GOE Lima, LLC v. Ohio Farmers Ins. Co.

In Re: GOE Lima, LLC, Debtor.

GOE Lima, LLC, Plaintiff,

v.Ohio Farmers Insurance Company, Defendant and Third Party Plaintiff,

v.Smith-Boughan, Inc., Third Party Defendant.

Case No.: 08-35508

Adv. Pro. No. 09-3204

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO WESTERN DIVISION

Dated: October 1, 2012

The court incorporates by reference in this paragraph and adopts as the findings and analysis of this court the document set forth below. This document has been entered electronically in the record of the United States Bankruptcy Court for the Northern District of Ohio.

______________

Mary Ann Whipple

United States Bankruptcy Judge

Chapter 11

Hon. Mary Ann Whipple

MEMORANDUM OF DECISION REGARDING

MOTION TO STAY PENDING ARBITRATION

This adversary proceeding is before the court on a motion brought under 9 U.S.C. § 3 to stay this proceeding pending arbitration ("Motion ") [Doc. # 81] filed by intervenor PEA (Lit) ("PEA"), Defendant Ohio Farmers Insurance Company's ("OFIC") opposition [Doc. # 82], and PEA's reply [Doc. # 84]. PEAhas intervened as of right in this proceeding to protect its interest pursuant to an assignment by Plaintiff/ Debtor GOE Lima, LLC ("GOE") of claims under a performance bond issued by OFIC, which assignment, as discussed below, is challenged by OFIC. The court held a hearing on the motion at which attorneys for PEA and OFIC appeared in person. Having considered the parties' briefs and the arguments of counsel, for the reasons that follow, PEA's motion to stay will be granted.

BACKGROUND

The court has set forth the circumstances forming the basis of the complaint in this proceeding and events relating to this proceeding in previous opinions and summarizes those circumstances and events as reflected in the record thus far developed. The complaint is based upon a contract dispute between GOE, the debtor in the underlying Chapter 11 case, and Smith-Boughan, Inc. ("Smith-Boughan"). GOE and Smith-Boughan entered into a contract in 2006 for Smith-Boughan to provide certain mechanical services in connection with the construction of an ethanol facility on GOE's property in Lima, Ohio ("Construction Contract"). [See Doc. # 1, Complaint & attached Ex. A]. The Construction Contract incorporates by reference an agreement captioned "General Conditions of the Contract for Construction" ("General Conditions"). [Id., attached Ex. B]. The General Conditions include the following provisions:

§ 4.6.2 INITIAL DISPUTE RESOLUTION. If a dispute arises out of or relates to this Agreement or its breach, the parties shall endeavor to settle the dispute first through direct discussions. If the dispute cannot be settled through direct discussions the parties may endeavor to settle the dispute by mediation . . . . Either party may terminate the mediation at any time after the first session. . . .

§ 4.6.3 ARBITRATION

(Paragraph deleted)

§ 4.6.3.1 If a claim is not resolved through mediation, the sole remedy of any party to the mediation process shall be to make a written demand for binding arbitration. . . . Such arbitration shall be conducted by a panel of three arbitrators . . . in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then in effect unless the parties agree otherwise. . . .

(Paragraph deleted)

§ 4.6.3.2 The parties agree that all parties necessary to resolve a claim shall be parties to the same dispute resolution proceeding.

[Id. at 28-29 (emphasis and italicized words in original)].

The General Conditions define the term "claim" as follows:

A Claim is a demand or assertion by one of the parties seeking, as a matter of right, adjustment or interpretation of Contract terms, payment of money, extension of time or other relief with respect to the terms of the Contract. The term "Claim" also includes other disputes and matters in question between the Owner and Contractor arising out of or relating to the Contract.

[Id. at 25, § 4.3.1]. The General Conditions defines "the Contract" as consisting of the Contract Documents, [id. at 11, § 1.1.2], which it further provides include the Construction Contract, the General Conditions, and other specified documents that do not include the Performance Bond that is at issue in this proceeding, [id. at 11, § 1.1.1 & Ex. A, Articles 1 & 9].

As required under the General Conditions, OFIC, as surety, and Smith-Boughan, as Contractor/principal, executed a Performance Bond for the benefit of GOE, referred to in the bond as "Owner." [See id, attached Ex. C]. The first paragraph of the Performance Bond incorporates by reference the underlying Construction Contract as follows:

The Contractor and the Surety, jointly and severally bind themselves, their heirs, executors, administrators, successors and assigns to the Owner for the performance of the Construction Contract, which is incorporated herein by reference.

[Id., ¶ 1]. The Performance Bond sets forth certain steps that GOE must take before OFIC's obligations under the bond arise.¹ [Id., ¶ 3]. The Performance Bond provides, however, that "[n]o right of action shall accrue on this Bond to any person or entity other than the Owner or its heirs, executors, administrators or successors." [Id. at ¶ 7]. It further provides that "[a]ny proceeding, legal or equitable, under this Bond may be instituted in any court of competent jurisdiction . . . and shall be instituted within two years after Contractor Default or within two years after the Contractor ceased working. . ., whichever occurs first." [Id. at ¶ 9].

Disputes arose between GOE and Smith-Boughan. GOE terminated the Construction Contract on September 28, 2007. On October 14, 2008, GOE filed a voluntary petition for relief under Chapter 11 ofthe Bankruptcy Code. On January 30, 2009, Smith-Boughan commenced an adversary proceeding against GOE alleging, among other things, that GOE breached and wrongfully terminated the Construction Contract. [Adv. Pro. No. 09-3020, Doc. 1].² In its answer, GOE asserts a counterclaim for breach of contract. [Id., Doc. # 22]. On September 1, 2009, that proceeding was stayed pending the completion of arbitration proceedings between GOE and Smith-Boughan pursuant to 9 U.S.C. § 3. [Id., Doc. ## 39, 54 & 60].

On August 28, 2009, GOE commenced this adversary proceeding against OFIC, seeking judgment for damages allegedly caused by Smith-Boughan's breaches of the Construction Contract and for which OFIC is allegedly jointly and severally liable under the Performance Bond. OFIC filed a timely answer and third party complaint against Smith-Boughan for indemnification. [Doc. # 10]. In it answer, OFIC specifically denied GOE's averment that it has fulfilled conditions precedent to OFIC's obligations under the Performance Bond. [Id. at ¶ 15]. In its answer, OFIC avers that "all of the matters relating to performance under the contract between [GOE] and Smith-Boughan are to be determined in an arbitration which this Court has ordered to proceed and that, as a consequence, this action should be stayed until the ordered arbitration has been conducted." [Id. at ¶ 21]. On October 12, 2009, the parties filed a Stipulation, agreeing that this proceeding should be stayed pending completion of arbitration proceedings between GOE and Smith-Boughan in Adv. Pro. No. 09-3020 or further order of this court, [Doc. # 12], and the court entered an order to that effect on October 13, 2009, [Doc. # 14].

On October 18, 2010, OFIC filed a motion seeking relief from the court's order staying this proceeding for the limited purpose of filing, and the court deciding, a motion for summary judgment based upon its contention that GOE failed to perform conditions precedent to any obligation of OFIC under the Performance Bond. Although over a year had passed since this proceeding and Adv. Pro. No. 09-3020 had been stayed, an arbitration proceeding had not yet been commenced when the motion was filed. However, the contemplated arbitration was commenced on October 22, 2010, by PEA rather than GOE or Smith-Boughan.

During 2010, in GOE's underlying Chapter 11 case, GOE's First Amended Joint Plan of Liquidation ("Plan") had been confirmed. [Case No. 08-35508, Doc. # 612]. The Plan incorporated by reference a Settlement Agreement between, among others, PEA and GOE that the court had previously approved. [Id.& Doc. # 653]. The Plan and Settlement Agreement provide that GOE and the Liquidating Trust, created pursuant to the Plan, are deemed to have assigned to PEA, effective September 16, 2010, all of their rights, title and interest in the "Construction Claims," which include GOE's counterclaim against Smith-Boughan in Adv. Pro. No. 09-3020, as well as its claim against OFIC in this proceeding.³ [See id., Doc. # 612, Plan ¶ 7.8(a) and (b), and attached Ex. 2, Settlement Agreement, p. 5, ¶¶ 4 & 5].

PEA then filed an objection to OFIC's motion for relief from the court's order holding this case in abeyance pending arbitration and later filed a response to OFIC's status report regarding the arbitration proceeding.⁴ [Doc. ## 32 & 54]. In addition, in response to OFIC's motion to strike the documents filed by PEA based on the fact that PEA was not a party in this proceeding, PEA filed a motion to intervene as of right as an interested party under Federal Rule of Civil Procedure 24(a). [See Doc. ## 58 & 60]. To be entitled to intervene as of right, PEA was required to demonstrate a substantial legal interest in the subject matter of this proceeding. Blount-Hill v. Ohio, 636 F.3d 278, 283 (6th Cir. 2011). Characterizing the Performance Bond provision that "[n]o right of action shall accrue on the Bond to any person or entity other than the Owner or its heirs, executors, administrators, or successors" as an anti-assignment clause, OFIC argued that the Performance Bond precludes assignment of GOE's claim against it. However, finding that the Ohio Supreme Court would apply the reasoning set forth in Pilkington North America, Inc. v. Travelers Casualty & Surety...