Dudley v. Buffalo Rock Co.

STEWART RAY DUDLEY, Appellant, v. BUFFALO ROCK COMPANY, et al., Appellees.

Case No.: 2:19-cv-00519-RDP

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION

March 26, 2021

MEMORANDUM OPINION

This case is before the court on appeal from the United States Bankruptcy Court for the Northern District of Alabama's Memorandum Opinion and Order Sustaining the Objections of Buffalo Rock Company and James C. Lee, III to the Debtor's Claims of Exemptions Over Certain Life Insurance Policies. (Doc. # 1-3). This appeal has fully briefed, (Docs. # 5, 6, 7), and, because the appeal presents a narrow issue of law that has been adequately briefed by the parties, the court has determined oral argument is unnecessary to resolve this case.¹

The appeal, which arises out of years of litigation and arbitration, requires this court to decide three issues: (1) Is a bankruptcy court's (purportedly incorrect) decision to conduct a contested proceeding instead of an adversarial proceeding grounds for reversal without an accompanying showing of harm? (2) Is a bankruptcy court required to provide a litigant with an evidentiary hearing when that litigant cannot point to a contested issue of fact or otherwise provide the court with a justification as to how the outcome of that hearing could affect any issue in the case? (3) In what instances is a bankruptcy court bound by an arbitration award entered in statecourt? For the following reasons, the court concludes that the Bankruptcy Court did not commit reversable error with regard to any of the questions presented. Accordingly, the Bankruptcy Court's decision is due to be affirmed.

I. Background and Proceedings

While employed by Buffalo Rock Company,² Stewart Dudley ("Dudley" or "Debtor") entered into an agreement with his employer by which he received four American General Life Insurance Policies numbered U10107544L; U10107545L; U10107546L; U10107547L ("the Policies").³ (Doc. # 6 at 16-17). But the Policies, which were recently valued in excess of $13 million, (Doc. # 1-3 at 3-4), came with strings attached. Namely, Dudley agreed to reimburse Buffalo Rock for all of the premiums paid on the Policies plus $10 million and, of particular relevance to this appeal, Dudley signed a Memorandum of Understanding giving Buffalo Rock some rights to the Policies — although the extent and nature of those rights remain in dispute. (Bank. Doc. # 1021 at 5).

The Policies and the accompanying Memorandum of Understanding later became the subject of binding arbitration. After conducting an evidentiary hearing, an arbitrator issued an interim award determining (1) Dudley was obligated to repay Buffalo Rock for the premiums associated with the Policies plus an additional $10 million (for a total liability of either$29,879,174.11 or $39,879,174.11 at the time of the arbitration),⁴ and (2) the Policies should be placed in an express trust for the benefit of Buffalo Rock. (Doc. # 6 at 4). In reaching these determinations, the arbitrator concluded that the Memorandum of Understanding, entered into between Dudley and Buffalo Rock, created an express trust in favor of Buffalo Rock Company. (Doc. # 6 at 4). Accordingly, the arbitrator also entered a preliminary injunction precluding Dudley from taking any action with respect to the Policies. As a result of that preliminary injunction, Dudley was barred from using the Policies as collateral for any loans, withdrawing any cash value associated with the Policies, or taking any other action that would reduce the value of the Policies. (Doc. # 6 at 4).

Following the entry of the interim arbitration award, on April 5, 2016, the Honorable Judge Robert S. Vance entered two judgments against Dudley in the cases of Lee v. Dudley, No. 01-CV-2011-900773 (Jefferson Cty. Ct. Ala.) and Buffalo Rock Co. v. Dudley, No. 01-CV-2011-900461 (Jefferson Cty. Ct. Ala.). Those judgments confirmed the interim arbitration award and, specific to this matter, confirmed Dudley was liable to repay Buffalo Rock in the amount of $29,879,147.11 from the proceeds of the policies. The judgments also confirmed that the Memorandum of Understanding created an express trust in favor of Buffalo Rock with regard to the Policies. (Doc. # 5-1 at 141-44).

A month after Judge Vance entered the judgments against Dudley in state court, Dudley filed for bankruptcy under Chapter 11 of 11 U.S.C. § 101. (Doc. # 5-1 at 3-107). Because of Dudley's Chapter 11 filing, an automatic stay was entered that halted all actions by Dudley'screditors to collect debts. A week after the bankruptcy petition was filed, Buffalo Rock filed a Motion for Relief from the Automatic Stay in Order to Complete Pending Arbitration and State Court Litigation Against Stewart Ray Dudley. (Bank. Doc. # 20). In that Motion, Buffalo Rock sought, among other things, an order lifting the stay to allow the arbitrator to enter a final award and resolve the two remaining issues in the arbitration (the amount of attorney's fees and costs due to Buffalo Rock and an award of damages to James C. Lee, III for the Debtor's failure to provide an accounting). (Bank. Doc. # 20). The Bankruptcy Court permitted the arbitrator to finalize the award, which the arbitrator entered on August 12, 2016. (Doc. # 5-1 at 125). The final award (together with the interim award, which is referred to by the court as the "Arbitration Awards") was filed in the state court proceedings on August 15, 2016, and entered as a judgment in those proceedings on September 19, 2016. (Doc. # 5-1 at 125).

But, back to the bankruptcy proceedings. During those proceedings, Dudley claimed the Policies were exempt from the bankruptcy estate under Alabama law, pursuant to 11 U.S.C. § 522(b)(3). (Doc. # 6 at 16). Buffalo Rock objected on the grounds that the Arbitration Awards (and subsequent entry in the state court proceedings) precluded the Bankruptcy Court from making any determination regarding the ownership of the Policies. (Bank. Doc. # 145). Several rounds of briefing on that question followed. (Doc. # 1-3 at 6-8). Dudley took the position that the Arbitration Awards were not a final decision that determined ownership of the Policies (and thus a decision that could give rise to res judicata) because the Arbitration Awards were the subject of a Rule 59 motion to reconsider and because he had reached a settlement with the Internal Revenue Service that -- to some degree -- was inconsistent with the final arbitration award. (Doc. # 1-3 at 7). In addition to briefing those issues, Dudley responded to Buffalo Rock's objection by requesting anevidentiary proceeding so that he could present additional evidence regarding the ownership interest he held in the Policies. (Doc. # 5 at 4-5).

After the briefing concluded, the Bankruptcy Court concluded that no legally relevant facts were in dispute and that none of Dudley's arguments were relevant to a res judicata determination. (Bank. Doc. # 1028). The Bankruptcy Court then listed the undisputed facts and requested Dudley's counsel state on the record whether he believed any of those facts were in dispute. (Bank. Doc. # 1028). Dudley's counsel responded by stating "[w]e don't disagree to those facts" and by adding, however, that "as it relates to who owns these [P]olicies, there are other facts that could be introduced that would help this court make that decision." (Bank. Doc. # 1028). The Bankruptcy Court then directed Dudley's counsel to "share [the relevant and/or disputed facts] ... now ... because so far no one has presented anything ... that represents any sort of dispute of fact." (Bank. Doc. # 1028). Dudley's counsel did not provide any such disputed or relevant fact, and the Bankruptcy Court issued a judgment on the pleadings and sustained Buffalo Rock's objection to the Debtor's exclusion of the Policies from the bankruptcy estate. (Bank. Doc. # 1028). Soon after, the Bankruptcy Court entered the Memorandum Opinion and Order Sustaining the Objections of Buffalo Rock Company and James C. Lee, III to the Debtor's Claims of Exemptions Over Certain Life Insurance Policies. (Doc. # 1-3). This timely appeal followed. (Doc. # 1).

II. Standard of Review

A District Court reviews a Bankruptcy Court's factual findings under the clearly erroneous standard. See In re Club Associates, 951 F.2d 1223, 1228-29 (11th Cir. 1992). Thus, when a district court hears an appeal from a bankruptcy court, its job is not to make independent factual findings; rather, the task of fact finding is the purview of the bankruptcy court. See Fed. R. Bankr. P. 7052; In re Sublett, 895 F.2d 1381, 1384 (11th Cir. 1990). This court will overturn the BankruptcyCourt's factual findings only if they are "clearly erroneous." In re Sublett, 895 F.2d at 1384. Of course, this court reviews a bankruptcy court's legal conclusions de novo. In re Tennyson, 611 F.3d 873, 875 (11th Cir. 2010) (citation omitted); Consumer Portfolio Servs. v. Coleman, 342 B.R. 817, 819 (N.D. Ala. 2006).

III. Analysis

The Debtor asserts the Bankruptcy Court erred by (1) not conducting an adversarial proceeding to determine ownership of the Policies, (2) not conducting an evidentiary hearing as requested by the Debtor, and (3) concluding the Bankruptcy Court was bound by the arbitration award. The court will address each argument in turn.

A. Contested Versus Adversarial Proceedings

The Debtor first argues that the Bankruptcy Court erred by conducting a contested proceeding instead of an adversarial proceeding to resolve the ownership dispute over the Policies. (Doc. # 5 at 9-11). This argument can be resolved in favor of appellees on waiver grounds. Debtor never requested an adversarial proceeding before the Bankruptcy Court and never objected to the Bankruptcy's Court's decision to adjudicate ownership of the Policies through a contested proceeding. In fact, the first time Debtor raised the prospect of an adversarial proceeding was in his appellant brief before this court. (Doc. # 5)....