In re Patriot Solar Grp., LLC

569 B.R. 451

IN RE: PATRIOT SOLAR GROUP, LLC, Debtor.

Case No. 17–00984–jtg

United States Bankruptcy Court, W.D. Michigan.

Signed June 26, 2017

Cody H. Knight, Esq., RAYMAN & KNIGHT, Kalamazoo, Michigan, for Patriot Solar Group, LLC;

Julie Beth Teicher, Esq., ERMAN, TEICHER, ZUCKER & FREEDMAN, P.C., Southfield, Michigan, for Vanguard Energy Partners, LLC; David E. Bevins, Esq., RHOADES McKEE P.C., Grand Rapids, Michigan, for Huntington National Bank;

Elisabeth Von Eitzen, Esq., WARNER NORCROSS & JUDD, LLP, Grand Rapids, Michigan, for Shape Corporation.¹

OPINION REGARDING MOTION FOR RELIEF FROM AUTOMATIC STAY

John T. Gregg, United States Bankruptcy Judge

This matter comes before the court on a motion for relief from the automatic stay [Dkt. No. 48] (the "Motion") filed by Vanguard Energy Partners, LLC ("Vanguard"). In the Motion, Vanguard requests relief from the automatic stay to continue to arbitrate its claims and effectuate rights of setoff and/or recoupment against Patriot Solar Group, LLC (the "Debtor"). The Debtor, its prepetition secured lender, and one of its largest general unsecured creditors object to the Motion because enforcement of the arbitration provisions in various contracts between Vanguard and the Debtor would conflict with the underlying purposes of bankruptcy in this recently filed Chapter 11 case. They further argue that because Vanguard's claims are disputed and unliquidated, Vanguard's request for setoff and/or recoupment is premature. For the following reasons, the court shall deny the Motion.

JURISDICTION

The court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157. This is a core proceeding under 28 U.S.C. § 157(b)(2)(G) (motions for relief from automatic stay).

BACKGROUND

The facts, at least as presented in the Motion and the objections thereto, are relatively straightforward. The Debtor supplies, delivers and mounts various components for customers in the solar power industry and employs seventeen full time employees. Prior to the petition date, Vanguard and four project owners entered into contracts whereby Vanguard agreed to construct solar electric generating systems, among other things, for the project owners. Vanguard, in turn, enlisted the Debtor to manufacture, construct and deliver ground mounted racking systems and related equipment for each of the four projects pursuant to four purchase orders (the "Purchase Orders"). Separately, the Debtor agreed to secure permits and unload and install equipment for Vanguard with respect to each of the four projects pursuant to four subcontractor agreements (the "Subcontractor Agreements").²

In each of the Subcontractor Agreements, Vanguard and the Debtor agreed to submit any claims arising thereunder to binding arbitration. The Subcontractor Agreements all state as follows with respect to arbitration:

Contractor and Subcontractor ... agree to submit all claims, disputes and controversies relating to this Agreement to binding arbitration in the State of New Jersey. All claims, disputes and controversies between the Parties arising out of this Agreement shall be decided by final and binding arbitration in accordance with the construction industry arbitration rules of the American Arbitration Association. Notice of the demand for Arbitration shall be filed in writing with the other Party and with the American Arbitration Association. Each Party agrees to have any claim, dispute or controversy arising out of this Agreement decided by a neutral arbitrator and each Party gives up any rights to have any such dispute litigated in a court or by jury trial.

(Subcontractor Agr. at § 9.1.)

The relationship between Vanguard and the Debtor soured soon after the Subcontractor Agreements were executed and the Purchase Orders were accepted. According to Vanguard, the Debtor was unable to perform under all of the Subcontractor Agreements and Purchase Orders for a variety of reasons. Vanguard thus contends that as a result of the Debtor's breaches, it was forced to arrange for third parties to complete certain work under the Purchase Orders and the Subcontractor Agreements.

On February 14, 2017, Vanguard filed a demand for arbitration and a complaint against the Debtor with the American Arbitration Association. In its demand and complaint, Vanguard sought damages under the Purchase Orders and the Subcontractor Agreements in the aggregate amount of approximately $3.4 million. The American Arbitration Association thereafter scheduled an initial conference in the arbitration proceeding for March 7, 2017 in New Jersey.

On March 3, 2017, the Debtor commenced a civil action in the state court of Massachusetts for breach of contract against Vanguard and the surety bond issuer for the projects. Only three days later and one day before the initial conference in the arbitration proceeding, the Debtor filed a voluntary petition for relief under Chapter 11 in this court. The Debtor is currently acting as a debtor in possession under sections 1107 and 1108 of the Bankruptcy Code.³ In its schedules, the Debtor identified Vanguard as holding a disputed claim in the approximate amount of $3.9 million. As of the date of the hearing on the Motion, Vanguard had not filed a proof of claim in this case.⁴

On April 13, 2017, Vanguard filed its Motion. Vanguard contends that in light of the arbitration provisions in all four Subcontractor Agreements, cause exists to grant it relief from the automatic stay to proceed with the arbitration of its claims against the Debtor and assert the right of setoff and the defense of recoupment.

The Debtor, supported by Huntington National Bank, its prepetition secured lender ("Huntington"), and Shape Corporation, one of its largest general unsecured creditors ("Shape"), filed an objection [Dkt. No. 55] (the "Objection") in which it argues that under the facts and circumstances of the case, an inherent conflict exists between arbitration and the underlying purposes of the Bankruptcy Code.⁵

As such, the Debtor, Huntington and Shape maintain that the court has discretion whether to enforce the arbitration provisions in the Subcontractor Agreements. The Debtor, Huntington and Shape also assert that because Vanguard has not filed a proof of claim, it would be premature to decide whether Vanguard should be allowed to effectuate setoff and/or recoupment.

The court held a hearing regarding the Motion on May 25, 2017. At the conclusion of the hearing, the court took the matter under advisement.

DISCUSSION

In its Motion, Vanguard argues that cause for relief from the automatic stay exists because its claims against the Debtor are subject to arbitration. Vanguard also somewhat generically contends that cause exists to allow it to assert rights of setoff and/or recoupment. Section 362 of the Bankruptcy Code provides that relief from the automatic stay should be granted for "cause." 11 U.S.C. § 362(d)(1). Because "cause" is not defined in the Bankruptcy Code, courts should determine on a case by case basis whether relief from the automatic stay is appropriate. Laguna Assocs. Ltd. P'ship v. Aetna Cas. & Sur. Co. (In re Laguna Assocs. Ltd. P'ship) , 30 F.3d 734, 737 (6th Cir. 1994) (citation omitted). One court has described "cause" as an "elastic concept," which can vary depending on the stage in the proceedings at which the relief from stay is sought. Chrysler LLC v. Plastech Engineered Prods., Inc. (In re Plastech Engineered Prods., Inc.) , 382 B.R. 90, 109 (Bankr. E.D. Mich. 2008) (citation omitted); see also Sumitomo Trust & Banking Co. v. Grand Rapids Hotel L.P. (In re Holly's Inc.) , 140 B.R. 643, 700 (Bankr. W.D. Mich. 1992) (burden on debtor under section 362(d)(2) less stringent early in Chapter 11 case) (citation omitted). Notwithstanding this elasticity, the Federal Arbitration Act, 9 U.S.C. § 1 et seq . (the "Arbitration Act") is entitled to great deference when relief from the automatic stay is sought in order to enforce an agreement to arbitrate. See In re Hermoyian , 435 B.R. 456, 463 (Bankr. E.D. Mich. 2010) (citation omitted).

A. The Federal Arbitration Act and the Bankruptcy Code

Under the Arbitration Act, a written agreement to arbitrate "shall be 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. The Arbitration Act represents "a liberal federal policy favoring arbitration agreements." 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) ; see Gilmer v. Interstate/Johnson Lane Corp. , 500 U.S. 20, 25, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991).

The Arbitration Act is intended to enforce private agreements to arbitrate while encouraging the "efficient and speedy resolution" of disputes. Dean Witter Reynolds, Inc. v. Byrd , 470 U.S. 213, 221, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). A court must therefore "rigorously enforce agreements to arbitrate even if the result is ‘piecemeal’ litigation, at least absent a countervailing policy manifested in another federal statute." Id . ; see 9 U.S.C. § 3 ; see also Stout v. J.D. Byrider , 228 F.3d 709, 714 (6th Cir. 2000) (identifying factors to consider when considering whether to enforce arbitration agreement in non-bankruptcy context). This requirement is not lessened when a party subject to an arbitration agreement raises a claim based on a statutory right. Shearson/Am. Express, Inc. v. McMahon , 482 U.S. 220, 226, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987).

However, "[l]ike any statutory directive, the Arbitration Act's mandate may be overridden by a contrary congressional command." Id . at 226, 107 S.Ct. 2332. In McMahon , the United States Supreme Court instructed lower courts to deduce such contrary congressional command by considering (i) the text of the statute, (ii) the statute's legislative history, or (iii) an inherent conflict between arbitration and the statute's underlying purposes. Id . at 227, 107 S.Ct. 2332. The party opposing enforcement of an agreement to...