Goldsmith v. Macri Assocs., Inc. (In re E & G Waterworks, LLC)

571 B.R. 500

IN RE: E & G WATERWORKS, LLC, Debtor

Jonathan R. Goldsmith, Chapter 7 Trustee, Plaintiff

v.Macri Associates, Inc., Defendant

Case No. 15–40816–EDK

Adversary Proceeding Case No. 16–4106

United States Bankruptcy Court, D. Massachusetts, Central Division.

Signed July 27, 2017

Jonathan R. Goldsmith, Goldsmith, Katz & Argenio, P.C., Springfield, MA, pro se.

Patrick Birney, Robins & Cole LLP, Hartford, CT, Peter Strniste, One Boston Place, Boston, MA, for Defendant.

MEMORANDUM OF DECISION

Elizabeth D. Katz, United States Bankruptcy Judge

Before the Court is the "Motion to Compel Arbitration" (the "Arbitration Motion") filed by Macri Associates, Inc. ("Macri"), the defendant in this adversary proceeding. Through the Arbitration Motion, Macri seeks an order compelling the plaintiff, Jonathan R. Goldsmith, Chapter 7 trustee (the "Trustee"), to arbitrate the Trustee's claim for turnover under § 542(b) of the United States Bankruptcy Code¹ as well as additional claims for recovery based on various state law theories. At a hearing on the Arbitration Motion held on June 30, 2017, the Court announced that the motion would be denied, and stated that a memorandum of decision detailing its reasons for the denial would be forthcoming. After further review of the circumstances of the case and the relevant law, the Court remains persuaded that its bench ruling was correct and the Arbitration Motion will be denied.

I. BACKGROUND AND POSITIONS OF THE PARTIES

E & G Waterworks, LLC (the "Debtor") operated as a water pipeline repair and construction business prior to filing a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on April 27, 2015. Prior to the bankruptcy filing, the Debtor provided services to Macri as subcontractor on a construction project at the University of Hartford in Connecticut. Under their agreement (the "Agreement"), entered into in March 2014, the Debtor was to be paid a total of $123,000. On the petition date, according to the Debtor's business records (including an invoice attached to the adversary complaint), Macri owed $79,950 to the Debtor for services performed and materials provided for the project (the "Receivable"). As Macri acknowledged in the Arbitration Motion, and counsel confirmed in open court, it is undisputed that the Debtor provided all of the services and materials required by the Agreement. Arbitration Motion, at ¶ 25.

On December 19, 2016, the Trustee commenced this adversary proceeding against Macri to collect the Receivable. The four-count complaint alleges primarily that the Receivable is subject to turnover pursuant to 11 U.S.C. § 542(b) (Count I). In the alternative, the Trustee relies on state-law theories to support his right to collect payment from Macri, namely, claims for account stated (Count II), breach of contract (Count III), and quantum meruit/unjust enrichment (Count IV).²

In its answer to the complaint, Macri generally denies that it is obliged to turnover the remaining funds due under the contract. Notably, nowhere does Macri deny the amount or validity of the debt per se, but appears to raise an argument that the amount owed to the Debtor should be offset by some amount owed to Macri on account of the Debtor's failure to provide "an extended warranty for its work," which Macri says was required by the Agreement.³

Macri then filed its Arbitration Motion, asking the Court to force the Trustee to arbitrate the claims raised in the adversary proceeding, arguing that an arbitration clause in the Agreement should be enforced here. Macri says the relief sought by the Trustee is a non-core, run-of-the-mill state-law breach of contract claim and should be submitted to arbitration. The Trustee maintains that the turnover count is a core proceeding under the Bankruptcy Code, which should stay with this Court for resolution. The Trustee also asserts that Macri is essentially trying to seek a postpetition setoff against a prepetition claim in contravention of the Bankruptcy Code. After the June 30, 2017 hearing at which the Court announced its intention to deny the Arbitration Motion, the matter was taken under advisement.

II. DISCUSSION

The Agreement between the Debtor and Macri provides that "[a]ll disputes will be resolved through binding arbitration with the CT Industry of Arbitration rules of the American Arbitration Association." Trustee Opp., Ex. B. The Federal Arbitration Act ("Arbitration Act") "establishes a federal policy favoring arbitration," Shearson/American Exp., Inc. v. McMahon , 482 U.S. 220, 226, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (citing Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp. , 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) ), and makes clear that arbitration agreements are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. In the bankruptcy context, a bankruptcy court "may stay a proceeding if an issue involved is covered by an arbitration agreement, and order the parties to proceed to arbitration in accordance with the terms of the agreement." Sternklar v. Heritage Auction Galleries, Inc. (In re The Rarities Group, Inc.) , 434 B.R. 1, 7 (D. Mass. 2010) (citing 9 U.S.C. §§ 3, 4 ). However, the Arbitration Act's mandate to enforce an arbitration clause can be superseded by a "contrary congressional command."

McMahon , 482 U.S. at 226, 107 S.Ct. 2332 ; see also Rarities Group , 434 B.R. at 7 ("If Congress intended to preclude a waiver of judicial remedies for certain statutory rights, the [Arbitration Act] does not compel courts to enforce an otherwise valid arbitration.").

Whether a court should compel arbitration is a two-part inquiry. Rarities Group , 434 B.R. at 7–8. The court must first determine whether the dispute before it falls within the scope of the relevant arbitration clause. If so, the court then determines "whether Congress has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue." Green Tree Fin. Corp. v. Randolph , 531 U.S. 79, 90, 121 S.Ct. 513, 148 L.Ed.2d 373 (2010). The burden is on the party seeking arbitration as to the first part of the inquiry; it is on the party resisting arbitration as to the second. Rarities Group, 434 B.R. at 8 (citing InterGen N.V. v. Grina , 344 F.3d 134, 142 (1st Cir. 2003) and Green Tree , 531 U.S. at 90, 121 S.Ct. 513 ).

Whether the relevant arbitration clause covers the instant dispute is an issue of contract law. Green Tree, 531 U.S. at 90, 121 S.Ct. 513 ; Rarities Group, 434 B.R. at 8. Generally, courts "should apply ordinary state-law principles that govern the formation of contracts" to determine "whether the parties agreed to arbitrate a certain matter." First Options of Chi., Inc. v. Kaplan , 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). State contract law, however, must be applied "with due regard to the federal policy favoring arbitration." PaineWebber, Inc. v. Elahi , 87 F.3d 589 (1st Cir. 1996) ; see also In re Payton Const. Corp., 399 B.R. 352, 358 (Bankr. D. Mass. 2009) ("while applying ordinary state-law principles of contract law and interpretation to discern the parties' intentions, the Court must, as a matter of federal law, resolve doubts in favor of arbitrability").

Here, the arbitration clause uses broad language, indicating that "all" disputes should be subject to arbitration. Courts interpreting similar language have found that such clauses are "broad enough such that the presumption of ‘arbitrability’ is applicable." First Sealord Sur., Inc. v. TLT Constr. Corp ., 765 F.Supp.2d 66, 72–73 (D. Mass. 2010) ; see also Payton, 399 B.R. at 359 (turnover demand was within the scope of the arbitration provision). The Trustee seeks turnover of property of the bankruptcy estate under § 542 of the Code. Because the right to turnover arises from the Debtor's performance under the Agreement, the Court finds that this matter falls within the scope of the Agreement's arbitration clause.⁴

The second, and more complex issue is whether Macri is correct in its assertion that the arbitration clause must be enforced here. In Shearson/American Express, Inc. v. McMahon , the Supreme Court established a general framework for evaluating this question. 482 U.S. 220, 227, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (upholding enforceability of agreements to arbitrate Securities Exchange Act and RICO claims). The Court held that:

The burden is on the party opposing arbitration to show that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue .... If Congress did intend to limit or prohibit waiver of a judicial forum for a particular claim, such an intent will be deducible from the statute's text or legislative history or from an inherent conflict between arbitration and the statute's underlying purposes.

Id. at 226–27, 107 S.Ct. 2332 (emphasis supplied). " McMahon thus recognizes that the [Arbitration Act] may be overridden by contrary Congressional command in another federal statute." Payton , 399 B.R. at 361.

As the Payton court noted, however, McMahon was not a bankruptcy case, and "the extent to which the Bankruptcy Code and related jurisdictional statutes evince a Congressional intention to preclude a waiver of judicial remedies for matters arising in bankruptcy cases" is far from concretely established. Id. Neither the express text nor the legislative history of the Bankruptcy Code is instructive. See In re Electric Machinery Enterprises, Inc. , 479 F.3d 791, 796 (11th Cir. 2007) (citing Mintze v. Am. Gen. Fin. Servs., Inc. (In re Mintze) , 434 F.3d 222, 231 (3d Cir. 2006) ); Rarities Group , 434 B.R. at 9 ; Payton , 399 B.R. at 361. As such, the primary question for a bankruptcy court is whether arbitrating the dispute poses an "inherent conflict" with the Bankruptcy Code. The results have been mixed.

Although not universal, there is general agreement in the case law that bankruptcy courts...