Glassman, Edwards, Wyatt, Tuttle & Cox, P.C. v. Wade (In re Wade)

• Decision Date: 15 December 2014
• Docket Number: 13–00208.,Adversary Nos. 13–00197,Bankruptcy No. 13–21432–K.
• Citation: 523 B.R. 594
• Parties: In re B.J. WADE, S.S. No. XXX–XX–XXXX, Debtor. Glassman, Edwards, Wyatt, Tuttle & Cox, P.C., Plaintiff, v. B.J. Wade, the above-named Chapter 7 Debtor, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Tennessee

523 B.R. 594

In re B.J. WADE, S.S. No. XXX–XX–XXXX, Debtor.Glassman, Edwards, Wyatt, Tuttle & Cox, P.C., Plaintiff

v.B.J. Wade, the above-named Chapter 7 Debtor, Defendant.

Bankruptcy No. 13–21432–K.

Adversary Nos. 13–00197

13–00208.

United States Bankruptcy Court, W.D. Tennessee, Western Division.

Signed Dec. 15, 2014.

Filed Dec. 16, 2014.

David Wade, Esq., Adam J. Eckstein, Esq., Russell W. Savory, Esq., Memphis, TN, Attorneys for B.J. Wade.

E. Franklin Childress, Jr., Esq., M. Ruthie Hagan, Esq., Memphis, TN, John A. Day, Esq., Brentwood, TN, Attorneys for the Law Firm.

James E. Bailey, III, Esq., Lynda F. Teems, Esq., Memphis, TN, Attorneys for Chapter 7 Trustee.

Karen P. Dennis, Trial Attorney, Memphis, TN, U.S. Trustee for Region 8.

MEMORANDUM AND ORDER RE DEFENDANT'S “MOTION TO DISMISS, OR IN THE ALTERNATIVE, TO COMPEL ARBITRATION AND STAY PROCEEDINGS PENDING RESOLUTION OF ARBITRATION” COMBINED WITH RELATED ORDERS AND NOTICE OF THE ENTRY THEREOF

INTRODUCTION

DAVID S. KENNEDY, Chief Judge.

Prior to the filing of this voluntary Chapter 7 case, the plaintiff, Glassman, Edwards, Wyatt, Tuttle, & Cox, P.C. (the “Law Firm”), filed a civil action complaint seeking damages against the defendant, Mr. B.J. Wade, (“Mr. Wade”), the above-named Chapter 7 debtor, in Shelby County Tennessee Chancery Court (“State Court”) alleging primarily that Mr. Wade, a former employee, shareholder, and officer of the Law Firm, operated a “shadow law firm” thereby intentionally breaching, among other things, his fiduciary duty to the Law Firm resulting in conversion and conspiracy charges. Mr. Wade responded by filing a motion in the State Court seeking to dismiss the Law Firm's complaint or in the alternative to compel arbitration (the “Motion to Compel Arbitration”).¹

After Mr. Wade voluntarily commenced this Chapter 7 case, the Law Firm timely removed its lawsuit against Mr. Wade from the State Court to this bankruptcy court, being Adv. Proc. No. 13–00197 (the “Removed Claim”). See 28 U.S.C. § 1452(a) ; Fed. R. Bankr.P. 9027(a) ; Fed. R. Bankr.P. 7001(10). This removal procedure utilized by the Law Firm had the byproduct effect of also removing to the bankruptcy court Mr. Wade's Motion to Compel Arbitration. Now, as a preliminary matter to resolving the Removed Claim, the bankruptcy court will firstly address and resolve Mr. Wade's Motion to Compel Arbitration.

This proceeding involving litigation between the Law Firm and Mr. Wade squarely addresses the statutory tension and obvious inherent conflict of coequal federal statutes: the Federal Arbitration Act (“FAA”), infra, and the Bankruptcy Code. A statutory clash clearly exits here between the underlying purposes of these two coequal federal statutes that do not reference one another or specify how they are to interact. Generally speaking, such federal statutory and contractual claims indeed are subject to arbitration if requested by a party, unless Congress intended to preclude waivers of judicial remedies or an inherent conflict exists between arbitration and another federal statute (e.g., the Bankruptcy Code).²

It is expressly noted that numerous threshold questions may/must be litigated when the underlying arbitration agreement itself is in dispute: (1) the validity and enforceability of the arbitration agreement; (2) whether the FAA applies to the arbitration agreement; (3) whether the FAA or State law applies to the specific issue(s); (4) whether relevant provisions of the FAA conflicts with the relevant provisions of the Bankruptcy Code; (5) whether contract defenses apply; (6) whether the parties expressly agreed to arbitrate arbitrability; (7) what other issues the parties agreed to arbitrate; and (8) whether the federal bankruptcy court should exercise sound discretion under the existing facts and circumstances of a particular case.

It also is noted that under some circumstances, the immediate parties conceivably, and unfortunately, could litigate more over the threshold arbitration questions than the actual underlying legal dispute itself. The bankruptcy court should exercise its discretion with great care to assure that the threshold arbitration dispute is appropriately resolved in the most just, speedy, and inexpensive manner as possible.³ Sometimes, this means compelling arbitration, while at other times arbitration may only frustrate the judicial process and should be avoided. Here, the bankruptcy process provides the bankruptcy court and also the immediate parties (and other parties in interest, e.g., the U.S. trustee, Chapter 7 trustee, and creditors) a wider latitude than is provided outside of bankruptcy in that a centralized forum is available to analyze and address all the factors and issues and concomitantly to make the most just, speedy, and economic decisions.

Accordingly and for all the reasons discussed below, the court finds under the particular facts and circumstances and applicable law of this case and proceeding that the FAA should not be applied. Therefore, the bankruptcy court exercises discretion and denies Mr. Wade's Motion to Compel Arbitration.

Procedural History

Mr. Wade commenced this Chapter 7 case by voluntarily filing a liquidating Chapter 7 bankruptcy petition on February 10, 2013. The U.S. trustee for Region 8 (“U.S. Trustee”) appointed Lynda F. Teems, Esquire (“Trustee”), as the Chapter 7 trustee (i.e., the § 323(a) statutory representative) of this § 541(a) estate. As noted earlier, shortly after the filing of this Chapter 7 case, the Law Firm filed a notice of removal of the State Court action that removed its pre-bankruptcy lawsuit (i.e., the Removed Claim) against Mr. Wade from the State Court to this bankruptcy court, being Adv. Proc. No. 13–00197.⁴ At the time of the removal action, the parties had made very little progress towards resolving the merits of the Removed Claim because discovery disputes arose regarding arbitration that actually proceeded on appeal to the Tennessee Supreme Court. At the time of Mr. Wade's voluntary Chapter 7 bankruptcy case filing, the issue had been submitted to the Tennessee Supreme Court by the parties, but the Tennessee Supreme Court had not yet issued its decision. In addition to timely removing the State Court lawsuit, the Law Firm also filed in the bankruptcy court an independent and separate adversary proceeding pursuant to Fed. R. Bankr.P. 7001(6) seeking to determine the dischargeability of its particular asserted claims against Mr. Wade under 11 U.S.C. § 523(a)(2), (4), and (6), being Adv. Proc. No. 13–00208 (the “Dischargeability Claim”).

Mr. Wade then filed a motion asking the bankruptcy court to abstain under 28 U.S.C. § 1334(c) and Fed. R. Bankr.P. 5011 from hearing both the Removed Claim and the liability portion of the Dischargeability Claim and also to remand the Removed Claim back to the State Court under 28 U.S.C. § 1452(b) and Fed. R. Bankr.P. 9027(d). Furthermore, Mr. Wade additionally sought relief under § 362(d)(1) from the automatic stay to allow the Tennessee Supreme Court to issue its judicial opinion on the pending State Court appeal and further to allow the State Court to proceed onto the questions related to arbitration. Both the Trustee and the Law Firm sought to conduct Fed. R. Bankr.P. 2004 examinations of Mr. Wade. Mr. Wade, in return, sought to quash the Law Firm's Rule 2004 examination and to obtain a protective order regarding the Trustee's Rule 2004 examination.

On March 21, 2013, the bankruptcy court granted limited relief from the § 362(a) automatic stay to allow the Tennessee Supreme Court to issue its opinion, which ultimately limited the discovery questions before the State Court to the questions regarding arbitration. On August 13, 2013, the bankruptcy court resolved all of the other immediate proceedings in a consolidated order (the “August 13, 2013 Order”) as follows: First, the bankruptcy court consolidated both bankruptcy adversary proceedings, Adv. Proc. Nos. 13–00197 and 13–00208, pursuant to Fed. R. Bankr.P 7042 and Fed.R.Civ.P. 42. The bankruptcy court, among other orders, denied Mr. Wade's motions for proceeding abstention under 28 U.S.C. § 1334(c) and remand under 28 U.S.C. § 1452(b) and fashioned a Rule 2004 examination procedure that allowed the Trustee to conduct her sought for Rule 2004 Exam with the Law Firm “observing.” The effect of this order was, in reality, to consolidate the Removed Claim and the Dischargeability Claim and keep all proceedings between these parties at this time in the bankruptcy court and, thereby, centralize all proceedings related to the administration of the case and estate of Mr. Wade into one forum—the bankruptcy court. Compare Fed. R. Bankr.P. 1001. The August 13,2013 Order was promptly appealed by Mr. Wade and is currently pending in the United States District Court of the Western District of Tennessee. The bankruptcy court denied Mr. Wade's request for a stay pending appeal and later denied his request for this court to reconsider its August 13, 2013 Order's procedure regarding the Rule 2004 examination.

Now, after over a year and a half of preliminary litigation in the bankruptcy court, the bankruptcy court finally comes to wrestle with the crux of the threshold issue and preliminary litigation involving these parties—the question of arbitration. Mr. Wade seeks, through his removed Motion to Compel Arbitration, to dismiss the Law Firm's complaint or to compel arbitration in the Removed Claim adversary proceeding. The Law Firm objects and, instead, seeks to have the bankruptcy court also try on the merits the Removed Claim (as well as the § 523(c) Dischargeability Claim).

Mr. Wade's Motion to Dismiss Adv. Proc. No. 13–00197

The court notes that Mr. Wade's instant Motion to Compel Arbitration also seeks to dismiss the Law Firm's complaint pursuant to Tenn. R. Civ. P. 12.02, which materially mirrors Fed. R. Bankr.P. 7012 and Fed.R.Civ.P. 12. The bankruptcy court proceeds to resolve this motion under the now applicable Federal Rules...