Santangelo Law Offices, P.C. v. Touchstone Home Health LLC (In re Touchstone Home Health LLC)
| Decision Date | 21 August 2017 |
| Docket Number | Bankruptcy Case No. 17–11134 TBM |
| Parties | IN RE: TOUCHSTONE HOME HEALTH LLC, Debtor. Santangelo Law Offices, P.C., Movant, v. Touchstone Home Health LLC, Respondent. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado |
Robert J. Shilliday, III, Denver, CO, for Debtor.
Alan K. Motes, Byron G. Rogers Federal Building, Denver, CO, for U.S. Trustee.
Does bankruptcy eclipse arbitration? Arbitration proceedings pending before bankruptcy generally are stopped by the automatic stay—a key protection that allows a bankruptcy debtor breathing space to reorganize. However, the automatic stay is not impregnable. Section 362(d)(1) 1 of the Bankruptcy Code permits the Court to grant relief from the automatic stay "for cause." Moreover, motions for relief from the automatic stay are ubiquitous in bankruptcy cases. Secured creditors frequently request relief from stay to foreclose on collateral. Creditors also often ask for permission to liquidate their claims against debtors through continuance of lawsuits pending prior to bankruptcy. This case presents a somewhat more unusual automatic stay scenario involving the interplay between arbitration and bankruptcy. The ultimate issue is whether a pre-petition claim against the debtor should be liquidated by arbitration—as mandated by contract—or by the Bankruptcy Court.
The Debtor, Touchstone Home Health LLC (the "Debtor"), provides home healthcare services. Years before it filed for bankruptcy, the Debtor engaged Santangelo Law Offices, P.C. (the "Law Firm") to protect the Debtor's intellectual property rights. The parties entered into a contract spelling out the terms of the attorney-client relationship, including the payment of fees and costs for legal services. Further, the parties agreed that any disputes that might arise between the Debtor and the Law Firm would be resolved by binding arbitration. Two years later, the Debtor became disenchanted with the legal services provided by the Law Firm and the fees charged. The Debtor fired the Law Firm and hired new attorneys.
Notwithstanding its termination as legal counsel, the Law Firm asserted that the Debtor failed to pay the Law Firm's outstanding bill. Receiving no satisfaction of the alleged obligation, the Law Firm commenced an arbitration proceeding against the Debtor in accordance with the parties' contractual arrangement. As is common in these sorts of fee disputes, the Debtor responded by accusing the Law Firm of legal malpractice. The parties completed all fact discovery and designated their expert witnesses. At the Law Firm's request, the arbitrator dismissed the Debtor's legal malpractice counterclaim. The only steps remaining in the arbitration process were for the arbitrator to rule on a pending motion for sanctions brought by the Law Firm and to issue a decision on the merits after conducting a final hearing. But, just a day before an important deadline in the arbitration, the Debtor filed for bankruptcy protection. The bankruptcy petition caused the arbitration to be stayed under Section 362(a)(1).
Promptly after the bankruptcy filing, the Law Firm filed a "Motion for Relief from Stay for Cause and to Enforce Arbitration Agreement Pursuant to Federal Arbitration Act." (Docket No. 46, the "Motion.") The Law Firm sought authorization to complete the arbitral process and liquidate its claim. The Debtor filed its "Response to Motion for Relief from Stay and to Enforce Arbitration Agreement filed by Santangelo Law Offices, P.C." (Docket No. 51, the "Response.") The Debtor opposed the Motion and advocated that the Court should decide the legal fees dispute in the context of the bankruptcy claims allowance and disallowance process under Section 502.
So, how should the Law Firm's claim against its former client be liquidated?
The Court determines that relief from stay "for cause" is warranted and the parties must be compelled to liquidate the Law Firm's claim by arbitration. After all, the parties agreed in their contract to resolve all disputes that way. Federal law strongly encourages arbitration as a dispute resolution mechanism. Thus, arbitration agreements generally are enforceable. While the Court attaches significant weight to the pre-bankruptcy arbitration arrangement between the parties, such contract is not itself dispositive. Instead, the Court ultimately must consider whether there is an inherent conflict between arbitration and bankruptcy law. Finding no inherent conflict in the context of this case, the Court is required to enforce the arbitration agreement. Even if the Court had discretion, the Court would exercise such discretion in favor of arbitration.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. The issues raised in the Motion and Response constitute a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) (), (G) (motions to terminate, annul, or modify the automatic stay), and (O) (other proceedings affecting the liquidation of assets of the estate). This Court has jurisdiction to enter final judgment with respect to the Motion and Response. Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
The Debtor filed for protection under Chapter 11 of the Bankruptcy Code on February 16, 2017. (Docket No. 1.) The Law Firm filed the Motion shortly thereafter. The Law Firm requested relief from stay "to proceed with the liquidation of claims involving the debtor or the debtor's estate pursuant to certain proceedings presently pending in an arbitration proceeding between Movant and Debtor before Arbitrator Dean Hermes, in Fort Collins, Colorado." (Docket No. 46–11.) The Debtor opposed the Motion and contended, among other things, that "cause does not exist for stay relief under Section 362(d)(1) and the Curtis factors." (Docket No. 51 at 9.) The Debtor proposes that the dispute between the Debtor and the Law Firm be resolved strictly within the confines of the bankruptcy process.
The Court conducted a Preliminary Hearing on the Motion and the Response in accordance with L.B.R. 4001–1(c)(1). The Court received oral offers of proof and exhibits. After considering various objections, the Court admitted into evidence Exhibits 1–4 and 6–14 offered by the Law Firm, as well as, Exhibit A offered by the Debtor. (Docket No. 61.)2 The parties presented fulsome legal argument in favor of their respective positions. Furthermore, both the Law Firm and the Debtor agreed that the Court should decide the Motion without an evidentiary hearing. At the conclusion of the Preliminary Hearing, the Court took the matter under advisement and confirmed that the automatic stay under Section 362(a) would remain in place until the Court's determination.3 The matter is ripe for decision.
The Debtor provides home healthcare services. Sometime during late 2012, the Debtor became aware of another company in the same home healthcare field using a very similar name: Touchstone Health Partners ("THP"). Given the likelihood of confusion between the two companies, the Debtor turned to the Law Firm, which specializes in intellectual property matters, to protect its rights.
The Debtor and the Law Firm entered into an "Agreement for Legal Services," dated December 21, 2012 (Ex. 1, the "Agreement"). The Agreement appears typical for the engagement of legal counsel in a commercial matter. Although the Agreement did not refer to THP by name, the parties limited the scope of the legal retention to intellectual property matters. (Id. ¶¶ 1 and 2.) In return for the Law Firm's providing legal services, the Debtor agreed to pay fees and costs according to an "attached Fee and Retainer Account Schedule." (Id. ¶ 3.) The "Standard Hourly Rates" for lawyers varied from $270 to $480 per hour depending on the experience of counsel. (Id. at Fee and Retainer Account Schedule.) The Law Firm promised to bill costs at "actual or estimated amounts." (Id. )
The Agreement provided various remedies if the Debtor failed to timely pay billed legal fees and costs. The Law Firm's remedies included, among other things, withdrawing from further representation, requiring the Debtor to pledge collateral as security, requiring the Debtor to obtain personal guarantees, converting the relationship to cash-in-advance payments, and filing legal action against the Debtor. The Debtor committed to pay "a service/interest charge" for any past-due amounts and authorized the Law Firm to recover fees and costs incurred in collection of "any amounts due." (Id . ¶ 3.)
Importantly, the Debtor and the Law Firm also agreed to a forum and venue for resolution of any disputes that might arise between them related to their attorney-client relationship (the "Arbitration Clause"). The Arbitration Clause states:
The parties agree to submit any controversy or claim in any way arising from this Agreement or the parties' relationship to confidential binding arbitration in Larimer County, Colorado by a single attorney . Such arbitration shall be conducted pursuant to the Commercial Arbitration Rules (CARs) of the American Arbitration Association (AAA) modified for efficiency to: (a) avoid the involvement of the AAA and with service by first-class mail and answer due 20 days thereafter ..., (b) to provide for the minimal amount of discovery and other pre-hearing procedures consistent with a fair resolution of the dispute, (c) to permit expedited injunctive relief, and (d) to endeavor for the dispute to be resolved within 180 days of the arbitrator's appointment. For further efficiency, selection of the arbitrator shall be made promptly by two independent attorneys, one of which may be selected by each party.
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