ORDER DENYING MOTION TO DISMISS AND GRANTING IN PART MOTION TO STAY
The matter before the court is the Motion to Dismiss, or in the Alternative, to Stay Based on Arbitration Agreement filed by defendants Bank of America, N.A. (“BOA”) and Jonathan P. Joyner (“Joyner”). A hearing was held in Raleigh, North Carolina, on June 5, 2012.
BACKGROUND
On or about January 10, 2003, TP entered into a Master Loan Agreement and a Promissory Note with BOA, secured by a deed of trust and security agreement. The Master Loan Agreement and Promissory Note contain arbitration clauses. The
On July 7, 2009, BOA filed a complaint against TP, the Bryants (owners of TP and guarantors of its debt to BOA) and HP, Inc. (a company owned by Ronald Bryant) in Pender County Superior Court for breach of the Promissory Note. It obtained ex parte orders of attachment against TP and the Bryants and issued various notices of garnishment to TP’s creditors and business associates ancillary to the action on the note. On August 10, 2009, the defendants filed a pro se answer and counterclaims against BOA for breach of the implied covenant of good faith and fair dealing. On September 28, 2009, BOA filed a motion to dismiss the counterclaims, which was heard before the Superi- or Court on October 5, 2009. The parties presented the court with a consent order that was entered by the court on October 8, 2009, dismissing TP, HP, and the Bryants’ counterclaims without prejudice. The consent order recognized that the counterclaims were submitted pro se, that the defendants had since retained counsel, and that the defendants intended to later seek leave of court to amend their pleadings. The counterclaims were never resubmitted or amended.
On March 1, 2010, TP filed a chapter 11 bankruptcy petition, which stayed the Pen-der County action as against it, leaving only a proceeding against the Bryants and HP. On September 23, 2010, BOA filed a motion for summary judgment against the non-debtor defendants. On October 7, 2010, the court entered summary judgment against the Bryants as guarantors of the TP debt and against HP in the amount of $24,739,548.88.
On March 31, 2011, TP initiated the present adversary proceeding against BOA and Joyner. On May 4, 2011, BOA filed a motion to dismiss, or in the alternative, to stay the adversary proceeding based upon the arbitration provisions in the loan documents. BOA asserts its right to arbitration, arguing that TP’s claims are covered by the arbitration agreement, are mostly non-core claims, and therefore the bankruptcy court should stay the action in favor of arbitration pursuant to Section 3 of the Federal Arbitration Act. On May 25, 2011, TP responded to BOA’s motion contending that BOA has waived its right to arbitrate and that compelling arbitration would substantially prejudice it.
Upon the joint request of the parties, on June 21, 2011, the court entered a Consent Order Regarding Mediation and Continuance of Hearing in which mediation was ordered and the hearing on BOA’s motion to dismiss was continued. Ultimately, the mediation failed. In the meantime, the Supreme Court decided Stern v. Marshall, — U.S. —,
DISCUSSION
Two threshold issues are presented to the court: 1) does the arbitration provision cover the types of causes of action asserted by TP; and 2) has BOA waived the arbitration clause? Only after those issues have been resolved, can the court consider BOA’s request to compel arbitration in lieu
The Scope of the Arbitration Provisions
The arbitration provision at issue is found in the Master Loan Agreement and provides as follows:
Any controversy or claim between or among the parties hereto including but not limited to those arising out of or relating to this Loan Agreement or any related agreements or instruments, including any claim based on or arising from an alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act
Master Loan Agreement, ¶ 10.12. Federal courts view a motion to compel arbitration in light of the strong federal and state policy favoring arbitration. See e.g., Patten Grading & Paving, Inc. v. Skanska USA Bldg., Inc.,
The adversary proceeding sets forth twelve causes of action:
The arbitration clause purports to cover any dispute between the parties, even those unrelated to the loan relationship. The language is broad and all encompassing, and in accordance with the majority of courts who have evaluated the scope of such provisions, the court finds that all of the causes of action asserted by the debtor are covered by the arbitration provisions. See, e.g., Cara’s Notions v. Hallmark Cards, Inc.,
Waiver
The court turns to the question of whether BOA has waived its rights under the arbitration clause. TP contends that BOA waited two years to assert the right to arbitration, and that it was prejudiced due to BOA’s delay. TP also argues that it was prejudiced by the activities undertaken by BOA in the state court action. Particularly, TP points to (1) the dismissal of the counterclaim in the state court ac
Waiver of the right to arbitrate is “not to be lightly inferred” and the party opposing arbitration bears a heavy burden of proving waiver. MicroStrategy, Inc. v. Lauricia,
Under Section 3 of the FAA, a party loses its right to arbitrate if it is in “default” in proceeding with such arbitration. 9 U.S.C. § 3. Default in this context resembles waiver, but due to the strong federal policy favoring arbitration, courts have limited the circumstances that can result in statutory default. Maxum Founds., Inc. v. Salus Corp.,
The extent of the moving party’s trial-oriented activity is a material factor in assessing whether the other party would be prejudiced. Fraser v. Merrill Lynch Pierce, Fenner & Smith, Inc.,
timeliness of the motion to compel arbitration, the degree to which the merits of the nonmovant’s claims have been contested by the party moving for arbitration, whether the non-movant is otherwise aware of the movant’s intention to seek arbitration, the extent of non-merits motion practice that has transpired, the movant’s assent to the trial court’s pretrial orders, and the degree to which the parties have engaged in discovery.
Zimmer v. CooperNeff Advisors, Inc.,
TP argues that because BOA waited two years from the time that it initiated its state court action against the debtor and related entities to assert a right to arbitration, BOA’s motion was untimely and that it has been thereby prejudiced. Even if the two year delay suggested by TP did, in fact occur, there is no evidence that such delay caused TP to suffer actual prejudice. As stated above and as noted by TP in its response, short delays should be heavily weighed against a finding of waiver and longer delays without evidence of prejudice do not constitute waiver. Plaintiffs Mem. of Law, Docket No. 11, p. 21. TP cites a number of cases in which a delay of 3 to 15 months in pursuing arbitration was found to be sufficient to support a finding of waiver.
TP next argues that BOA waived its arbitration rights by virtue of its conduct during the litigation in the state court action. TP contends that BOA acknowledged its right to assert its fraud-related claims in court when it obtained a consent order dismissing the counterclaims asserted by TP based on TP’s counsel’s indication that it intended to later seek leave of court to amend its pleadings. Accordingly, the counterclaims were dismissed without prejudice to TP. TP argues that by doing so, BOA acknowledged TP’s right to seek leave of court to file its claims instead of being required to seek arbitration of those claims and thus waived its right to arbitration.
However, TP fails to show what actual prejudice it suffered from the dismissal. The counterclaim was dismissed without prejudice. The dismissal was consented to by TP’s counsel at that time. TP could reassert those claims at some later time, and did in fact do so by way of initiating an adversary proceeding in this court. There were no contested hearings, discovery or briefing undertaken on this issue. TP did not incur substantial expense in obtaining the dismissal. In fact, even if the parties had engaged in some level of discovery or pretrial activity, or incurred some expense during the pre-trial or trial process, that would not necessarily support a finding of waiver. See e.g. Patten,
TP also argues that BOA took advantage of the court forum by securing attachment and other supplemental orders which were not otherwise available within the arbitration process and thus deprived TP of the use and pecuniary benefits of the property obtained by those supplemental litigation processes for the duration of this dispute. Obtaining an attachment order could be a factor for the court to consider in determining whether a party has been prejudiced. See Expofrut v. M/V ACONCAGUA,
Finally, TP argues that BOA obtained a final judgment finding that TP had defaulted on a valid debt, and this judgment impaired TP’s legal position by preventing it from disputing the validity or enforceability of the debt before an arbitrator or the court. However, the records show otherwise. BOA has already obtained orders and judgments which found the existence of a valid debt in the foreclosure proceedings in Pender County and Onslow County. TP did not appeal those orders, and they became final.
Moreover, even assuming that prior orders found the existence of a valid debt,
In conclusion, TP does not satisfy its heavy burden of establishing any actual prejudice from BOA’s activities in prior litigation, and BOA has not waived its right to arbitration. Inasmuch as BOA has not waived the arbitration provisions in the loan documents, the court must now determine whether the contractual right to arbitration supersedes the bankruptcy court’s authority to determine the dispute.
Federal Arbitration Policy
Arbitration provisions “generally are favored in federal courts. In bankruptcy proceedings, however, whether a proceeding is a ‘core proceeding’ as defined by 28 U.S.C. § 157(b) generally determines whether an arbitration clause can be enforced.” D & B Swine Farms, Inc. v. Murphy Brown, L.L.C.,
In light of this dichotomy between bankruptcy and arbitration policy, the court must evaluate each cause of action in the present adversary proceeding to determine whether it is a core proceeding. The bankruptcy court has authority to “hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11 ... and may enter appropriate orders and judgments.” 28 U.S.C. § 157(b)(1); Stern,
Some courts have found that although an action was initiated by a complaint rather than a traditional counterclaim, “such actions are in the nature of a counterclaim when asserted against parties who have filed proofs of claim in the bankruptcy case.” Shaia v. Taylor (In re Connelly),
Although inartfully presented as counterclaims to the state court action, the gist of those claims are substantially similar to the claims asserted by TP in this adversary proceeding and are intended by way of defense, or as a set off, to the claim filed by BOA or seek affirmative relief. These claims will therefore be treated as counterclaims asserted by the debtor to the claim filed by the creditor, therefore the claims asserted by TP are statutorily core. However, in light of Stern v. Marshall, the court must determine whether the claims are constitutionally core.
Ramifications of Stern v. Marshall on Bankruptcy Courts’ Authority to Enter Final Orders in Core Proceedings
In the recent case of Stern v. Marshall, the Supreme Court found that in certain instances, bankruptcy courts cannot constitutionally render final orders on proceedings deemed core under § 157(b)(2). Stern,
In order to determine whether a matter is constitutionally core, then, a bankruptcy court looks to the two-prong test derived from the Court’s decision in Stem. The first prong asks whether the action at issue stems from the bankruptcy itself, and the second asks whether the issue would “necessarily be resolved in” the claims allowance process. Stern at 2618; Yellow Sign,
1. Constmctive Fraud
TP’s first claim for relief, for constructive fraud, asserts that BOA and Joyner compelled and/or influenced TP to purchase lots owned by Joyner, using TP’s line of credit from BOA, resulting in substantial profits for BOA and Joyner at TP’s expense. This claim does not stem from the bankruptcy itself because it first arose in state court and is based on state law, and thus does not satisfy the first prong of Stem.
To assess the latter half of the Stem test, courts generally look to see if a “common nucleus of law and fact” exists to inextricably intertwine the claims and counterclaims. McElwee v. Scarff Bros., Inc. (In re McElwee),
In this first claim, TP asserts that BOA and Joyner took advantage of their position of trust in the lending relationship in order to benefit from larger profits from TP’s increased use of the line of credit. Although this cause of action stems from the transactions giving rise to BOA’s claim, it will not affect the calculation of the amount of BOA’s proof of claim. Instead, it appears that the bankruptcy estate seeks affirmative monetary relief in order to augment the size of the estate, as opposed to asking for a modification of the amount claimed by BOA (though that would indirectly augment the estate). As such, this claim is not inextricably intertwined with BOA’s proof of claim and would not necessarily be resolved in the claims allowance process, thereby failing to satisfy the second prong of Stem. Because it is therefore not a core proceeding, this claim will be referred to arbitration.
2.Fraud,
In its second claim for relief, TP asserts that during the course of the lending relationship, and particularly between 2002 and 2008, BOA and Joyner made false representations to TP and/or concealed facts with the intent to deceive TP, and that TP reasonably relied on such representations to its detriment. As with the claim for constructive fraud, this- claim does not stem from the bankruptcy itself because it first arose in state court and is based on state law, and thus does not satisfy the first prong of Stem.
Much like the first claim for constructive fraud, this cause of action arises out of the transactions underlying BOA’s claim, but will not affect the calculation of the amount of BOA’s proof of claim. As such, this claim would not necessarily be resolved in the claims allowance process and does not satisfy the second prong of Stem. This claim will be referred to arbitration.
3.Fraud in the Inducement
TP’s third claim, for fraud in the inducement, asserts that BOA fraudulently induced TP to obtain the line of credit. Based on this alleged fraud, TP contends there was no mutuality and/or consideration for the various loan instruments executed by TP, rendering the instruments unenforceable. Although this claim fails the first prong of the Stem test in that it first arose in state court and is based on state law, it passes the second prong because it attacks the enforceability of the loan documents, the basis for the proof of claim. As such, this claim will necessarily be resolved in the claims allowance process and constitutes a core proceeding. As a core proceeding, the court will issue a final ruling on whether BOA and Joyner fraudulently induced TP to enter into the loan instruments, thereby precluding enforcement of the instruments against TP. The claim will remain in this court for final determination.
4.Rescission
In its fourth claim for relief, TP asserts that based on the alleged false and fraudulent representations and concealments by BOA and Joyner, TP may rescind any agreement that it executed with BOA. Much like the claim for fraud in the inducement, this claim fails the first prong of
5. Breach of Fiduciary Duty
TP contends in its fifth claim, for breach of fiduciary duty, that BOA breached its obligation to act in good faith and with due regard to the interests of TP, to TP’s detriment in its decisions throughout the course of the lending relationship. This claim does not stem from the bankruptcy itself because it first arose in state court and is based on state law, and thus does not satisfy the first prong of Stem. Nor is the second prong of Stem satisfied. Although this cause of action arises out of the transactions underlying BOA’s claim, it will not affect the calculation of the amount of BOA’s proof of claim. As such, this claim would not necessarily be resolved in the claims allowance process. It will be treated as a non-core proceeding and referred to arbitration.
6. Negligence and Negligent Misrepresentation
In its “fifth” claim for negligence,
As to these claims, the court reiterates its reasoning set out above with respect to the first claim for constructive fraud. The negligence and negligent misrepresentation claims arose prior to the bankruptcy filing, are based on state law, will not affect the calculation of the amount of BOA’s proof of claim, and therefore do not satisfy either the first or second prong of Stem. These claims will be treated as non-core proceedings, and referred to arbitration.
7.Tortious Interference
TP further contends that BOA and Joyner essentially managed TP and did not provide promised financing, thereby interfering with TP’s obligations on contracts with other creditors, as well as business opportunities. According to TP, its ability to pay certain other creditors depended on its ability to sell the property it was improperly instructed to develop, and the breakdown in financing caused TP to abandon certain projects midstream or sell incomplete construction at a loss.
As to this claim as well, the court reiterates its reasoning set out above with respect to the first claim for constructive fraud. The tortious interference claim arose prior to the bankruptcy filing, is based on state law, will not affect the calculation of the amount of BOA’s proof of claim, and therefore does not satisfy either the first or the second prong of Stem. It will be treated as a non-core proceeding, and referred to arbitration.
8.Breach of Contract/Breach of Covenant of Good Faith and Fair Dealing
In its “eighth” claim, TP asserts that BOA breached its contracts with TP by failing to meet various obligations with regard to funding, administration, disbursement, and renewal of the line of credit. TP further asserts that BOA breached
Although this action stems from the transactions underlying BOA’s claim, it appears that TP seeks damages in order to augment the estate, rather than a reduction in the amount claimed by BOA. As such, this claim will not affect the calculation of the amount of BOA’s proof of claim, and therefore the second prong of Stem is not satisfied. This claim will be referred to arbitration.
9. Unfair and Deceptive Trade Practices and Alter Ego/Insider Liability
In its “ninth” claim, TP contends that the actions and conduct of BOA and Joyner during the lending relationship constitute unfair and deceptive trade practices under North Carolina law. TP’s “tenth” claim alleges that during the lending relationship, BOA and Joyner exercised dominion and control over TP’s business activities to the extent that TP functioned as BOA and Joyner’s alter ego, with no power over its own financial affairs. Each of these claims arose prior to the bankruptcy filing and are based on state law, and therefore fail the first prong of Stem.
Based on the reasoning set out above regarding the first claim for constructive fraud, the court finds that neither of these claims will affect the calculation of the amount of BOA’s proof of claim, such that each fails to satisfy the second prong of Stem. These claims will be treated as non-core proceedings, and referred to arbitration.
10. Equitable Subordination/Recharacterization
TP contends in its “eleventh” claim for equitable subordination or recharacterization that based on the detrimental nature of BOA and Joyner’s conduct during the lending relationship, any debt owed to BOA should be subordinated to the claims of other creditors of TP. In the alternative, TP requests that the court recharacterize any debt claimed by BOA as equity and a capital investment rather than a loan or line of credit.
Although this claim fails the first prong of the Stem test in that it arose prior to the bankruptcy filing and is based on state law, it passes the second prong because it directly attacks the amount set forth by BOA in the proof of claim. As such, this claim will necessarily be resolved in the claims allowance process and constitutes a core proceeding. As a core proceeding, the claim will remain in this court for final determination.
CONCLUSION
Based on the foregoing, the court finds that the claims for fraud in the inducement, rescission, and equitable subordination are core and it will exercise its jurisdiction to render final judgments as to those claims.
The claims for constructive fraud, fraud, breach of fiduciary duty, negligence, negligent misrepresentation, tortious interference, breach of contrad/breach of covenant of good faith and fair dealing, unfair and deceptive trade practices, and alter ego/insider liability are non-core. The court will stay proceedings as to those claims and refer them to arbitration.
Accordingly, the motion to dismiss is DENIED, and the motion to stay is GRANTED IN PART.
SO ORDERED.
Notes
. The complaint contains claims for relief numbered “First” through "Eleventh,” but there are two claims for relief labeled as the "Fifth."
. See Nino v. Jewelry Exchange, Inc.,
. BOA did not waive its right to arbitration by engaging in the judicial foreclosure process because the Master Loan Agreement provides that the “maintenance of an action for foreclosure” shall not “constitute a waiver of the right ... to arbitrate the merits of the controversy or claim occasioning resort to such remedies.” Master Loan Agreement, ¶ 10. 12(b).
. This is the second "fifth” claim as delineated in the complaint, thus it is actually the sixth claim; the claims that follow in the complaint are similarly misnumbered.