GOE Lima, LLC v. Ohio Farmers Ins. Co. (In re GOE Lima, LLC), Case No.: 08-35508

In Re: GOE Lima, LLC, Debtor GOE Lima, LLC, Plaintiff, v. Ohio Farmers Insurance Company Defendant.

Case No.: 08-35508

Adv. Pro. No. 09-3204

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO WESTERN DIVISION

Dated: March 19 2012

The court incorporates by reference in this paragraph and adopts as the findings and orders 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 Arn Whipple

United States Bankruptcy Judge

Chapter 11

Hon. Mary Ann Whipple

MEMORANDUM OF DECISION AND ORDER REGARDING

MOTION FOR RELIEF FROM ABEYANCE ORDER

On October 13, 2009, based on a stipulation of the parties, the court entered an order holding this adversary proceeding in abeyance pending completion of arbitration proceedings between Plaintiff GOE Lima, LLC, ("GOE") and Third-Party Defendant Smith-Boughan, Inc. ("Smith-Boughan"), on claims asserted in Adversary Proceeding No. 09-3020. GOE is the debtor is the underlying Chapter 11 case. Thisproceeding now is before the court on a motion filed by Defendant Ohio Farmers Insurance Company ("OFIC") for relief from the October 13, 2009, order to permit OFIC to file, and this court to decide, a motion for summary judgment ("Motion"), [Doc. # 27], and the opposition filed by PEA Lit, LLC ("PEA"), [Doc. # 32].¹ The court held a hearing on the motion at which attorneys for PEA and OFIC attended in person. An attorney for the Liquidating Trustee under Plaintiff's confirmed Chapter 11 plan attended by telephone. Having considered the parties' briefs and the arguments of counsel, for the reasons that follow, OFIC's Motion will be granted.

BACKGROUND

In 2006, GOE entered into a contract with Smith-Boughan for Smith-Boughan to provide certain services in connection with construction of an ethanol facility on GOE's property in Lima, Ohio ("Construction Contract"). The Construction Contract includes the following provisions:

§ 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. . . . Notice of demand for arbitration shall be filed in writing with the other party to this Agreement and with the American Arbitration Association. . . .

§ 4.6.3.2 The parties agree that all parties necessary to resolve a claim shall be parties to the same dispute resolution proceeding. Appropriate provisions shall be included in all other contracts relating to the Work to provide for the consolidation of such dispute resolution proceedings.

[Doc. 1, Complaint, ¶ 2 & Ex. B, pp. 28-29].

OFIC, as surety, and Smith-Boughan, as Contractor/principal, executed a Performance Bond for the benefit of GOE, designated therein as Owner. [Id., ¶ 3 & 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 obligationsunder the Bond arise.² [Id., ¶ 3].

Various disputes arose between GOE and Smith-Boughan, and GOE terminated the Construction Contract on September 28, 2007. On October 14, 2008, GOE filed a voluntary petition for relief under Chapter 11 of the 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].³ 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. [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 assertion 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 or further order of this court, [Doc. # 12], and the court entered an order to that effect on October 13, 2009.

At status conferences in April and August 2010 in both this case and Adv. Pro. No. 09-3020, the court was informed that neither GOE nor Smith-Boughan had taken any steps to initiate the arbitration contemplated in the court's orders. On September 16, 2010, GOE's First Amended Joint Plan of Liquidation ("Plan") became effective, [See Case No. 08-35508, Doc. # 739], and all of GOE's remaining assets, including its claims against Smith-Boughan and OFIC, were transferred to the Liquidating Trust. Pursuant to a Settlement Agreement approved by the court between GOE, the Committee of Unsecured Creditors, PEA and others, on the effective date of the Plan, all of GOE and the Liquidating Trust's "rights, title and interest" in the claims against Smith-Boughan and OFIC were "deemed to have [been] assigned to the Assignee," identified as PEA in the Agreement.⁴ [Id., Doc. # 612 and attached Ex. 2, p. 5, ¶ 5].

At a status conference held on October 28, 2010, PEA informed the court that it had filed a demand for arbitration with the American Arbitration Association ("AAA") on October 22, 2010, naming Smith-Boughan, OFIC, and two other entities as parties to the arbitration. However, the American Arbitration Association has since determined that PEA did not meet "the minimum filing requirements" with respect to OFIC and removed OFIC from the proceeding. [See Doc. # 49, Ex. 1].

LAW AND ANALYSIS

In its Motion, OFIC asks for limited relief from the court's October 13, 2009, order staying this proceeding in order that it may file and the court may decide a motion for summary judgment, the basis for which is GOE's alleged failure to comply with the conditions precedent to OFIC's obligations as set forth in the Performance Bond. OFIC argues that GOE has waived its right to arbitration of claims against OFIC by filing this adversary proceeding.⁵ PEA responds that OFIC's Motion should be denied, relying on the agreement entered into by GOE, OFIC, and Smith-Boughan that is evidenced by the stipulation filed on October 12, 2009, the court's October 13, 2009, order staying this proceeding, and on the Construction Contract arbitration provision and the Performance Bond, which incorporates the provisions of the Construction Contract. PEA also argues that 9 U.S.C. § 3 requires that the entire proceeding be stayed ifany issue within the proceeding is subject to arbitration.

The court first notes that the relief requested in OFIC's Motion is relief from the court's October 13, 2009, order. As stated above, that order stayed this proceeding pending the completion of arbitration proceedings between GOE and Smith-Boughan in Adv. Pro. No. 09-3020. It did not require OFIC to arbitrate the claim in this case. While OFIC voluntarily agreed to a stay of this proceeding pending arbitration of claims between GOE and Smith-Boughan, there has been no application for a stay pending arbitration of the claims asserted in this proceeding, and no order to that effect has been entered. Thus, the court ordered the stay not under the mandatory stay provision of the Federal Arbitration Act, 9 U.S.C. § 3, or its counterpart under Ohio law, Ohio Revised Code § 2701.02(B), but, rather, in the exercise of the court's inherent power to control its docket. See Landis v. North American Co., 299 U.S. 248, 254-55 (1936) ("[T]he power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants.").

The court also notes that OFIC is not a party in the arbitration proceeding. The Supreme Court has made it clear that the decision to stay litigation among nonarbitrating parties pending the outcome of arbitration is a decision that is left to the district court as a matter of its discretion." Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 21 n.23 (1983). In exercising its discretion, an important...