Great Oak NC Lender, LLC v. Cornblum et al
Filing
75
MEMORANDUM DECISION AND ORDER: The [CV-69 Doc. 66] Motion to Dismiss for Lack of Jurisdiction is DENIED and the [CV-69 Doc. 58] Petition to Confirm Arbitration Award is GRANTED and the Final Award of the Arbitrator [CV-69 Do c. 63-1] rendered 9/20/2010, is CONFIRMED as part of the Judgment of this Court. The [CV-34 61] Motion to Consolidate Cases, [CV-34 62] Motion to Stay and [CV-34 63] Motion to Stay are DENIED AS MOOT. Signed by District Judge Martin Reidinger on 08/28/2014. (Pro se litigant served by US Mail.) (klb) Modified text on 8/29/2014 (ejb). NEF Rengenerated.
THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
BRYSON CITY DIVISION
CIVIL CASE NO. 2:12-CV-34-MR
CIVIL CASE NO. 2:12-CV-69-MR
GREAT OAK NC LENDER, LLC,
)
)
Intervenor,
)
)
vs.
)
)
MARSHALL E. CORNBLUM,
)
MADELINE H. CORNBLUM,
)
MICHAEL CORNBLUM,
)
CAROLYN CORNBLUM, and
)
LONGBRANCH PROPERTIES, LLC, )
)
Respondents.
)
_______________________________ )
MEMORANDUM
DECISION AND ORDER
THESE MATTERS are before the Court on Intervenor Great Oak NC
Lender, LLC’s (“Great Oak”) Petition to Confirm Arbitration Award [CV-69
Doc. 58],1 and Respondents’ Motion to Dismiss for Lack of Jurisdiction,
both filed in case number 2:12-CV-69. [CV-69 Doc. 66]. Also pending are
Great Oak’s Motions to Consolidate Cases, to Stay Discovery, and to Stay
the Case, all filed in case number 2:12-CV-34. [CV-34 Docs. 61; 62; 63].
Even though these cases were brought separately, they arise from the
1
Citations to the record contain the relevant docket (i.e. CV-34 or CV-69) and document
number.
same underlying facts and circumstances. More importantly, however, the
legal analysis necessary to resolve case number 12-CV-69 will render case
number 12-CV-34 moot. Therefore, the Court finds it more efficient to set
forth its reasoning in this comprehensive memorandum, filed in both cases.
FACTUAL AND PROCEDURAL BACKGROUND
I.
Case Number 2:12-CV-34.
Plaintiff Asset Holding Company 5, LLC (“AHC5”) filed a Complaint
on August 17, 2012, naming as defendants Marshall E. Cornblum,
Madeline H. Cornblum, Michael Cornblum, Carolyn Cornblum, and
Longbranch Properties, LLC (“Longbranch” and collectively with the natural
persons “Defendants”). [CV-34 Doc. 1]. AHC5 alleged that Marshall and
Madeline Cornblum, as individuals, borrowed money from United
Community Bank (“UCB”), a Georgia corporation, and signed ten separate
promissory notes memorializing the debts that arose therefrom. [Id. at 2].
AHC5 further alleged that Longbranch, a limited liability company owned by
Marshall and Madeline Conblum, borrowed additional money from UCB
resulting in three more promissory notes.
[Id.].
Thereafter, Marshall,
Madeline, Michael, and Carolyn Cornblum each signed a personal guaranty
of the three promissory notes executed by Longbranch. [Id.]. Each of the
2
thirteen promissory notes was secured by a deed of trust on real property
located in either Swain or Jackson Counties, North Carolina. [Id.].
Marshall Cornblum, Madeline Cornblum, and Longbranch defaulted
under each of the thirteen promissory notes. [CV-34 Docs. 1 at 3; 7 at 3].
As a result of these defaults, UCB brought non-judicial (i.e. power of sale)
foreclosure actions pursuant to N.C. Gen. Stat. § 45-21.16 in Swain and
Jackson Counties in accordance with the power of sale provisions
contained in each of the thirteen deeds of trust. [Id.]. The Defendants filed
a motion in each of the thirteen foreclosure actions to stay the foreclosures
and compel UCB to arbitrate its foreclosure claims pursuant to the
arbitration clause found in each of the thirteen promissory notes and deeds
of trust. [Id.]. UCB opposed Defendants’ efforts to compel arbitration. [Id.].
The Clerks of Court for Swain and Jackson Counties rejected the
Defendants’ motion to compel arbitration and thereafter entered orders of
foreclosure in each of the thirteen matters. [CV-34 Docs. 1 at 4; 7 at 3].
The Defendants appealed the orders of foreclosure2 to the Superior
Court Division, renewing their motion to compel arbitration as well. [Id.].
The Superior Court granted the Defendants’ motion to compel arbitration
2
AHC5 alleged Defendants appealed only 12 of the 13 foreclosure orders. [CV-34 Doc.
1 at 4]. Defendants allege they appealed all 13 of the orders. [CV-34 Doc. 7 at 3]. For
reasons that are not made plain in the record, one foreclosure appears to have been
consummated at that time.
3
and stayed the twelve foreclosure actions pending arbitration. [Id.]. The
parties then began the arbitration process. In the midst of the arbitration
proceedings, UCB assigned the promissory notes and deeds of trust to
AHC5.3 [CV-34 Doc. 1-1]. UCB thereafter filed a motion in the arbitration
proceeding to add AHC5 as a party-claimant, which the Arbitrator granted.
[CV-34 Docs. 1 at 4; 7 at 3]. UCB remained a party to the arbitration
proceeding only to defend against the counterclaims asserted against it by
the Defendants. [Id.].
In the fall of 2010, the Arbitrator conducted hearings in Swain County
and issued a Final Award4 resolving all claims and counterclaims in favor of
UCB and AHC5 on September 20, 2010. [Id.]. UCB and AHC5 then filed a
motion in state court, pursuant to 9 U.S.C. § 9 and N.C. Gen. Stat. § 1-56922, to confirm the Final Award. [CV-34 Docs. 1 at 5; 7 at 3]. In response,
the Defendants filed a motion to vacate the Final Award pursuant to 9
U.S.C. § 10 in one of the foreclosure actions and an objection to UCB and
AHC5’s motion to confirm the Final Award in the others. [Id.]. The Superior
Court granted the motion to confirm the Final Award and entered its
3
The precise manner in which this transaction came about is not at all clear from the
record. It appears that UCB first loaned money to AHC5 in order for AHC5 to purchase
the Cornblum notes and deeds of trust from UCB whereupon UCB assigned the notes
and deeds of trust to AHC5 with UCB retaining a security interest therein. [CV-34 Doc.
31].
4
AHC5 filed a certified copy of the Final Award with its Complaint. [CV-34 Doc. 1-2].
4
confirmation judgment regarding all twelve actions that were arbitrated.
[CV-34 Docs. 1 at 5; 7 at 4]. The Superior Court’s judgment decreed that
the Final Award was confirmed and that the properties subject to
foreclosure be sold in accordance with the Final Award; that judgment be
entered in the amount of $10,979,924.99 against Marshall and Madeline
Cornblum, jointly and severally, of which $4,511,362.10 also be entered as
a judgment against Michael and Carolyn Cornblum, and Longbranch, jointly
and severally. [CV-69 Doc. 1-7 at 9].
Defendants appealed the Superior Court’s judgment to the North
Carolina Court of Appeals. [CV-34 Docs. 1 at 5; 7 at 4]. While the appeal
was pending, the substitute trustee under the twelve deeds of trust
conducted foreclosure sales by power of sale.5 At each of the foreclosure
sales AHC5 was the sole bidder and purchaser and thereafter acquired title
to each foreclosed parcel of real property by receiving trustee’s deeds from
the substitute trustee.
[CV-34 Doc. 18 at 4-5]. The sole argument raised
by the Defendants in their appeal was that the Superior Court lacked
subject matter jurisdiction to order arbitration, and to confirm any award
flowing therefrom, because of the limited nature of the foreclosure
5
AHC5 filed a partial satisfaction of judgment in the consolidated foreclosure matters
stating that the amount of $10,979,924.99 owed by Marshall Cornblum and Madeline
Cornblum should be offset by proceeds in the amount of $5,325,504.30 of which
$2,947,419.20 should offset against the $4,511,362.10 owed by Michael Cornblum,
Carolyn Cornblum, and Longbranch. [CV-34 Doc. 42-8 at 7].
5
proceeding. It is noted that it was the Defendants who had demanded that
the Superior Court order arbitration, and having been granted their wish
then argued that the court did not have the jurisdiction to give them what
they had asked for. [CV-34 Docs. 1 at 5; 7 at 4]. The North Carolina Court
of Appeals reluctantly agreed with Defendants’ jurisdictional argument and
vacated the Superior Court’s judgment in an opinion rendered on April 12,
2012.
In re Cornblum, --- N.C.App. ----, 727 S.E.2d 338 (2012), rev.
denied, 366 N.C. 404, 734 S.E.2d 864 (2012), cert. denied, writ denied,
366 N.C. 404, 734 S.E.2d 865 (2012), and rev. dismissed, 366 N.C. 404,
734 S.E.2d 866 (2012). The appellate court held that “submitting this case
to arbitration and confirming the arbitration award fell outside of the
superior court's subject matter jurisdiction.” Id., 727 S.E.2d at 342.
The
court further held that, as to the Defendants’ claim that the foreclosure
sales were void as well, their argument was moot since such sales
occurred after the parties’ rights became fixed in foreclosure. Id.
Four months after the North Carolina Court of Appeals decision,
AHC5 filed its Complaint here in case number 12-CV-34.
AHC5 asserted
claims for breach of contract based on the Defendants’ default under the
promissory notes, deeds of trust, and guaranty agreements. [CV-34 Doc.
1]. Defendants filed a joint Answer [CV-34 Doc. 6], and then an Amended
6
Answer. [CV-34 Doc. 7]. Thereafter, the parties filed numerous pretrial
motions not relevant here. On June 26, 2013, counsel for AHC5 moved to
withdraw from further representation of Plaintiff. [CV-34 Doc. 28]. The
Magistrate Judge granted the withdrawal request by AHC5’s counsel on
June 28, 2013, and ordered Plaintiff AHC5, a limited liability company, to
obtain new counsel within ten days from the entry of the order or suffer
dismissal. [CV-34 Doc. 29].
On July 1, 2013, Great Oak filed a motion seeking to intervene. [CV34 Doc. 30].
Great Oak explained that AHC5 had defaulted under its
agreement with UCB which, in turn, enabled UCB to direct the disposition
of its collateral – AHC5’s rights pursuant to the promissory notes, deeds of
trust, and guaranties executed by the Defendants and assigned to AHC5,
as well as AHC5’s position regarding the arbitration award – in which it held
a security interest. [CV-34 Doc. 32 at 2]. UCB thereafter brought about the
sale and transfer of those rights to Great Oak on June 26, 2013. [Id.].
Thus Great Oak sought to intervene as a matter of right five days after this
transaction with the filing of its intervention motion. Great Oak’s motion
asserted that it then had, by virtue of its acquisition of AHC5’s position, an
interest in the subject matter of the action, that the disposition of the action
7
would impair its ability to protect that interest, and that its interest was not
adequately represented by the existing parties. [Id. at 3].
On August 12, 2013, the Court entered an Order dismissing the 12CV-34 matter without prejudice due to AHC5’s failure to retain counsel.
[CV-34 Doc. 34].
As a part of that Order, the Court (erroneously) denied
as moot Great Oak’s motion to intervene. [Id. at 2].
On September 9,
2013, Great Oak filed a motion to amend or correct the Court’s August 12,
2013, dismissal Order pursuant to Fed.R.Civ.P. 59(e). [CV-34 Doc. 41].6
After receiving briefs by both sides regarding Great Oak’s Rule 59 motion,
the Court entered an order vacating that part of its August 12, 2013 Order
denying as moot Great Oak’s motion to intervene. [CV-34 Doc. 48]. The
Court then granted Great Oak’s motion to intervene recognizing that “Great
Oak’s claims are identical to those asserted by AHC5 and that by
intervening in the action Great Oak seeks to ‘step into the shoes’ of AHC5
as the new owner of the Cornblum loans.” [Id. at 9]. Upon receipt of the
Court’s permission to intervene, Great Oak filed its Intervener Complaint
November 26, 2013. [CV-34 Doc. 52]. Following the filing of Defendants’
Answer [CV-34 Doc. 57], Great Oak moved to stay discovery in this matter,
and to consolidate this case with 12-CV-69, or in the alternative, to stay this
6
Great Oak also filed a notice of appeal [CV-34 Doc. 40] as to the Court’s August 12,
2013 Order, which it later voluntarily dismissed. [CV-69 Doc. 55].
8
case pending the resolution of case 12-CV-69. [CV-34 Docs. 61; 62; 63].
Great Oak’s three motions remain pending at this time.
II.
Case Number 2:12-CV-69.
The factual history underlying case 12-CV-69 mirrors that of case 12-
CV-34. The procedural history of case 12-CV-69 closely tracks that of case
12-CV-34 with one important exception. AHC5 commenced the 12-CV-69
action by filing a Motion for Order Confirming Arbitration Award pursuant to
the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., naming as
respondents natural persons Marshall, Madeline, Michael, and Carolyn
Cornblum, and the limited liability company Longbranch. [CV-69 Doc. 1].
Much like what transpired in the 12-CV-34 case, following the start of this
action the parties filed numerous motions. These motions, including Great
Oak’s motion to intervene [CV-69 Doc. 36], were ruled moot when the
Court dismissed the matter without prejudice based upon AHC5’s failure to
obtain new counsel.
[CV-69 Doc. 42]. Like the procedural history in 12-
CV-34, the Court partially vacated its dismissal order following Great Oak’s
request to do so made pursuant to Fed.R.Civ.P. 59. Upon the Court’s
granting Great Oak permission to intervene, Great Oak filed its petition to
confirm the arbitration award. [CV-69 Doc. 58]. The Defendants filed a
response in opposition thereto. [CV-69 Doc. 63]. Three months later, on
9
April 28, 2014, the Defendants filed a motion to dismiss this matter for lack
of subject matter jurisdiction. [CV-69 Doc. 66]. Great Oak’s petition to
confirm the arbitration award, the Defendants’ response thereto, and the
Defendants’ motion to dismiss for want of jurisdiction, remain pending at
this time.
DISCUSSION
The Court begins by discussing the two pending motions in case
number 12-CV-69: the Defendants’ motion to dismiss for want of subject
matter jurisdiction and Great Oak’s petition to confirm the arbitration award.
For obvious reasons, the Court will address the Defendants’ dismissal
motion first.
The Defendants have divided their dismissal motion into three
subparts. They contend:
First, when Great Oak purchased the Final Award on June 26,
2013, AHC5 no longer had Article III standing to pursue the
AHC5 Action, and the Court no longer had subject matter
jurisdiction over the AHC5 Action under Article III of the U.S.
Constitution. Second, the Court did not have subject matter
jurisdiction to allow Great Oak to intervene in the AHC5 Action
when the Court did not have subject matter jurisdiction over the
AHC5 Action, and the Court's only remaining function is to
dismiss Great Oak's Petition. Third, the Court cannot exercise
discretion to treat Great Oak's Petition as a separate action,
because Great Oak has failed to assert a separate and
independent basis for the Court's subject matter jurisdiction
over Great Oak's Petition.
10
[CV-69 Doc. 66 at 5-6].
The Defendants first argue that on June 26, 2013, when Great Oak
purchased AHC5’s rights and position from UCB, AHC5 lost its “personal
stake” in the outcome of this action “and the Court no longer had subject
matter jurisdiction over the AHC5 Action under Article III of the U.S.
Constitution.” [Id. at 6].
Defendants’ argument is a non sequitur. While
AHC5 may have lost its personal stake in the outcome on June 26, 2013,
and, therefore, its standing to pursue the Final Award, the Court still had
before it the contested question of whether the arbitrator’s Final Award
should be confirmed.
Thus Article III’s jurisdictional requirement of an
actual “case or controversy” remained satisfied. Lewis v. Continental Bank
Corp., 494 U.S. 472, 477 (1990). Further, the Defendants’ argument runs
headlong into the Federal Rules of Civil Procedure. As Great Oak points
out,
the very purpose of Rule 24(a)(2) intervention, as well as Rule
25(c) substitution, is to achieve judicial economy and fairness to
the acquiring party by permitting the lawsuit to continue in the
acquiring party’s name in those circumstances where the
original plaintiff lost its interest to the intervenor/substituted
party. The fact that the action is subject to dismissal as against
the original plaintiff does not alter the acquiring party’s right to
intervene.
[CV-69 Doc. 68 at 8]. AHC5 may have lost its right to pursue the Final
Award following its default to UCB when UCB recovered and sold AHC5’s
11
rights to Great Oak. The Court, however, never lost its “case or
controversy” jurisdiction.
The debt at issue was owed to some entity.
Therefore, this Court has subject matter jurisdiction to hear Great Oak’s
motion for confirmation of the Final Award as the successor-in-interest to
AHC5 and as the intervenor herein. Defendants’ first ground for dismissal
is without merit.
Defendants next argue that, after the Court entered an Order of
Dismissal on August 9, 2013, which dismissed AHC5 Action, the Court
possessed no subject matter jurisdiction over this matter under Article III
because no "case" or "controversy" existed any longer. [CV-69 Doc. 67 at
11]. Conveniently omitted by Defendants from their memorandum is the
fact that Great Oak filed its motion to intervene on July 1, 2013, well over
one month before the Court dismissed AHC5 from this matter. [CV-69 Doc.
36]. Had the Court not erroneously denied as moot Great Oak’s motion to
intervene at the time it dismissed AHC5, Defendants would have no basis
to put forward this argument. The Court’s October 2013 Order correcting
its preceding August 2013 Order was effective nunc pro tunc to the
erroneous denial of Great Oak’s motion to intervene. Defendants’ second
ground for dismissal is thus meritless.
12
Finally, Defendants assert that the Court’s allowing Great Oak to
intervene was a futile act because Great Oak’s Petition does not allege a
separate and independent basis for diversity jurisdiction. “Rather, it relies
solely on the diversity jurisdiction between AHC5 and Respondents existing
at the commencement of the AHC5 Action.” [CV-69 Doc. 67 at 17]. For
this case to continue any further with Great Oak as intervenor, Defendants
contend that complete diversity must exist between them, on the one hand,
and Great Oak on the other. And, since Great Oak – being a limited liability
company – must show that its members and owners are completely diverse
from all of the Defendants and it “has not disclosed the name and
citizenship of each of its constituent members, it has not established
diversity of citizenship between [itself] and Respondents.” [Id. at 18].
Had Great Oak been the original plaintiff bringing this action, the
Defendants’ argument would be correct. Great Oak, however, became the
intervenor only after AHC5 properly filed this diversity action and only after
AHC5 defaulted on its obligations to UCB, two events completely beyond
the control of Great Oak and the latter of which necessitated its
intervention. The Supreme Court, under circumstances such as these, has
construed 28 U.S.C. § 1332 so as to relax the “complete diversity” rule
following the initiation of a civil diversity suit. In Freeport–McMoRan, Inc. v.
13
K N Energy, Inc., 498 U.S. 426 (1991) (per curiam), the Court held that the
existence of diversity jurisdiction must be evaluated at the time the action
was filed, not at the time a claimant seeks to intervene.
Our decision last Term in Carden [v. Arkoma Assoc., 494 U.S.
185 (1990)] considered whether the citizenship of limited
partners must be taken into account in determining whether
diversity of jurisdiction exists in an action brought by a limited
partnership. The original plaintiff in Carden was a limited
partnership; diversity of jurisdiction, then, depended upon
whether complete diversity of citizenship existed at the time the
action was commenced. But nothing in Carden suggests any
change in the well-established ruled that diversity of citizenship
is assessed at the time the action is filed. We have consistently
held that if jurisdiction exists at the time an action is
commenced, such jurisdiction is not divested by subsequent
events.
Id. at 428.
The Court’s rationale underlying Freeport–McMoRan is all the
more forceful in this matter since the petitioner in Freeport–McMoRan, like
Great Oak here,
was not an “indispensable” party at the time the complaint was
filed; in fact, it had no interest whatsoever in the outcome of the
litigation until sometime after suit was commenced. Our cases
require no more than this. Diversity jurisdiction, once
established, is not defeated by the addition of a nondiverse
party to the action. A contrary rule could well have the effect of
deterring normal business transactions during the pendency of
what might be lengthy litigation. Such a rule is not in any way
required to accomplish the purposes of diversity jurisdiction.
Id. at 428-29. For these reasons, Defendants’ final ground for dismissal is
without merit.
14
Having determined that it retains subject matter jurisdiction in this
case, the Court next addresses the Defendants’ three contentions in
opposition to Great Oak’s petition to confirm the Final Award.
The Supreme Court has made clear that Congressional policy,
specifically a preference for the arbitration of disputes when the parties to a
contract so agree, favors such manner of resolution over litigation.
Section 2 [of the FAA] is a congressional declaration of a liberal
federal policy favoring arbitration agreements, notwithstanding
any state substantive or procedural policies to the contrary. The
effect of the section is to create a body of federal substantive
law of arbitrability, applicable to any arbitration agreement
within the coverage of the Act.
Moses Cone Mem. Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24 (1983);
in accord Rainwater v. Nat'l Home Insurance Co., 944 F. 2d 190, 194 (4th
Cir. 1991) (per curiam). To come within the purview of the FAA, 9 U.S.C.
§ 2 provides in pertinent part that a written provision in “a contract
evidencing a transaction involving commerce to settle by arbitration a
controversy thereafter arising out of such contract … shall be valid,
irrevocable, and enforceable[.]” Id.
There is no question but that the
parties’ promissory notes for the purchase of real property in Swain and
Jackson Counties evidences transactions involving commerce. The Court
15
thus turns to the relevant provision contained within the promissory notes7
to which the parties agreed:
ARBITRATION. Lender and Borrower agree that all disputes,
claims end controversies between them whether individual, joint
or class in nature, arising from this Note or otherwise, including
without limitation contract and tort disputes, shall be arbitrated
pursuant to the financial services rules of Endispute, Inc., d/b/a
J.A.M.S./ENDISPUTE or its successor in effect at the time the
claim is filed, upon request of either party. No act to take or
dispose of any collateral securing this Note shall constitute a
waiver of this arbitration agreement or be prohibited by this
arbitration agreement. This includes, without limitation,
obtaining injunctive relief or a temporary restraining order;
invoking a power of sale under any deed of trust or mortgage;
obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including
taking or disposing of such property with or without judicial
process pursuant Article 9 of the Uniform Commercial Code.
Any disputes, claims, or controversies concerning the
lawfulness or reasonableness of any act, or exercise of any
right, concerning any collateral securing this Note, including any
claim to rescind, reform, or otherwise modify any agreement
relating to the collateral securing this Note, shall also be
arbitrated, provided however that no arbitrator shall have the
right or the power to enjoin or restrain any act of any party.
Judgment upon any award rendered by any arbitrator may be
entered in any court having jurisdiction. Nothing in this Note
shall preclude any party from seeking equitable relief from a
court of competent jurisdiction. The statute of limitations,
estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the
commencement of an arbitration proceeding shall be deemed
7
The Arbitration provision contained within the “Commercial Guaranty” agreements
executed by the natural person Defendants is the same in all material respects as the
corresponding provision contained within the promissory notes signed by Marshall and
Madeline Cornblum. [CV-69 Doc. 1-4 at 3].
16
the commencement of an action for those purposes. The
Federal Arbitration Act shall apply to the construction,
interpretation, and enforcement of this arbitration provision.
[CV-69 Doc. 1-2 at 3].
From the plain language of this provision, the Court concludes that
this constitutes an agreement between the parties that they will arbitrate
any disputes arising from the interpretation and enforcement of the terms of
the promissory notes, deeds of trust, and guaranty agreements. Similarly,
the parties agreed to arbitrate any disputes arising from the foreclosure
proceedings regarding the real property which is collateral for the notes.
Defendants do not dispute this requirement at all. In their Response to
Great Oaks’ motion to confirm, Defendants concede that the parties
participated in an arbitration, that the arbitrator made proper findings, and
that the arbitrator ultimately entered a Final Award. [CV-69 Doc. 63 at 3-4].
Defendants further agree that “[n]o request was made to correct the Final
Award. The Final Award is final and conclusive on the merits of all claims
submitted to arbitration.” [Id. at 4]. It is further noted that the Defendants
sought and obtained an order from the Superior Court to compel arbitration
of this dispute pursuant to this contract provision. The fact that the dispute
was subject to arbitration and properly arbitrated is not contested.
17
Defendants, however, present different arguments in their attempt to
avoid the consequences of the arbitration they admit was proper. They
argue that: (1) the doctrines of res judicata and collateral estoppel bar
Great Oak’s petition to confirm the Final Award; (2) Great Oak cannot
confirm the Final Award in this Court because it is prohibited from doing so
under North Carolina law; and (3) Great Oak was not a party to the
arbitration and therefore does not have standing to seek confirmation of the
Final Award. [Id. at 2]. The Court will address the Defendants’ arguments
seriatim.
This case having been brought as a diversity action, the Court looks
to North Carolina substantive law as applicable to the Defendants’
arguments concerning issue and claim preclusion. “The doctrines of res
judicata (claim preclusion) and collateral estoppel (issue preclusion) are
companion doctrines which have been developed by the Courts for the dual
purposes of protecting litigants from the burden of relitigating previously
decided matters and promoting judicial economy by preventing needless
litigation.” Williams v. Peabody, 217 N.C.App. 1, 5, 719 S.E.2d 88, 92
(2011). Both doctrines share as a precondition to their application that the
previous litigation asserted as a bar to the current action was the result of a
final judgment on the merits. Id. at 6, 719 S.E.2d at 93.
18
Under North Carolina law, a dismissal of an action for lack of subject
matter jurisdiction is not a final judgment on the merits.
Foreman v.
Foreman, 144 N.C.App. 582, 587, 550 S.E.2d 792, 796 (2001). In the
parties’ first appeal to the North Carolina Court of Appeals, the appellate
court observed that a foreclosure instituted by power of sale is an
expedited process governed by N.C. Gen. Stat. § 45–21.16. In order to
exercise the power of sale granted in a loan document, the mortgagee or
trustee must initiate a hearing before the clerk of court which, by statute, is
narrow and limited in scope to the statutory duties specifically enumerated.
In re Cornblum, --- N.C.App. at ---, 727 S.E.2d at 341. Critically, the statute
prescribes precisely how to affect a foreclosure by power of sale and
constrains the clerk’s subject matter jurisdiction (or that of the superior
court judge on appeal de novo) by prohibiting the clerk (or judge) from
entertaining or ruling upon any matter beyond the four corners of the
statute.
“[H]ad the trial court actually issued findings regarding [the]
respondents' Arbitration Motion, it would have exceeded its jurisdiction by
addressing an issue not related to the six findings set forth in N.C. Gen.
Stat. § 45–21.16(d).” In re Pugh, --- N.C.App. ----, 725 S.E.2d 22, 22
(2012).
If the Defendants’ desire was to suspend the foreclosure
proceedings to permit arbitration, the proper method to accomplish this task
19
would have been to seek a temporary restraining order from the state
superior court to halt the sale. N.C. Gen. Stat. § 45–21.34. Further, any
such TRO must be obtained before the parties rights become “fixed”
pursuant to N.C. Gen. Stat. § 45–21.29A, which states, “[i]f an upset bid is
not filed following a sale, resale, or prior upset bid within the period
specified in [Article 2A of Chapter 45], the rights of the parties to the sale or
resale become fixed.” Id.; In re Cornblum, --- N.C.App. at ---, 727 S.E.2d at
341.
The Defendants did not seek nor did they obtain a TRO halting the
foreclosure proceedings to allow for the arbitration to go forward. They
were successful in convincing the state court to compel arbitration,
something it was without subject matter jurisdiction to do within the
confines of a power of sale foreclosure proceeding.
As a result, the
Superior Court’s ultra vires acts regarding the compulsion of arbitration or
the confirmation of any final award were void ab initio and in no way a final
judgment on the merits. In other words, even though the Superior Court
did not have the jurisdiction to decide the arbitration question, it did not
decide the question against the intervenor or its predecessor. Without a
final judgment deciding the matter, Defendants’ argument that the doctrines
20
of res judicata and collateral estoppel apply to bar Great Oak’s efforts to
confirm the Final Award in this Court must fail.
Defendants’ second argument is that since Great Oak could not
obtain a judgment confirming the Final Award from a North Carolina state
court, this Court sitting in diversity cannot confirm the Final Award either.
Defendants argue that, since the Swain County Superior Court – in the
midst of a foreclosure by power of sale proceeding – was without
jurisdiction to compel arbitration or confirm the Final Award, Great Oak
cannot confirm the Final Award in this Court because it is prohibited from
doing so under North Carolina law. Defendants cite Angel v. Bullington, 330
U.S. 183 (1947) in support of their argument. Defendants, however, read
far too much into Angel.
Angel stands for the proposition that a federal
court in North Carolina, sitting in diversity, is the functional equivalent of
another North Carolina court of general jurisdiction.
Ergo, if a North
Carolina state court would be without subject matter jurisdiction to hear a
claim, a federal court in North Carolina, sitting in diversity, would be
precluded from hearing the same claim.
The flaw in Defendants’ argument is that North Carolina courts can
confirm arbitration awards, and could have confirmed the Final Award at
issue in this case under North Carolina law. As explained above, North
21
Carolina courts can enjoin a foreclosure sale and then hear a motion
regarding arbitration, or the confirmation of a final award, provided it is not
brought within the foreclosure proceeding under N.C. Gen. Stat. § 4521.34. See In re T.R.P., 360 N.C. 588, 597, 636 S.E.2d 787, 794 (2006)
(the trial courts’ subject matter jurisdiction is broad enough under § 4521.34 to entertain arbitration motions). Accordingly, the holdings of Pugh
and Cornblum simply teach that arbitration matters cannot be heard or
considered as a part of a foreclosure by power of sale proceeding under
N.C. Gen. Stat. § 45–21.16. Neither case stands for the proposition that
North Carolina courts are without subject matter jurisdiction to hear them at
all. Because this Court is not prohibited from confirming the Final Award
under North Carolina law, the Defendants’ second argument also fails.
Finally, Defendants argue that Great Oak was not a “party” to the
arbitration and therefore does not have standing to seek confirmation of the
Final Award. [CV-69 Doc. 63 at 2]. While the language of section 9 of the
FAA refers to a “party to the arbitration,” this language was not intended to
override commercial law pursuant to which a “secured party’s disposition of
collateral after default … [t]ransfers to a transferee for value all of the
debtor’s rights in the collateral.” N.C. Gen. Stat. § 25-9-617(a)(1). See
Kentucky River Mills v. Jackson, 206 F.2d 111, 120 (6th Cir. 1953)
22
(assignee of arbitration award was the real party in interest and entitled to
sue in federal court to enforce the award). It is undisputed that Great Oak
was the transferee of AHC5’s rights following AHC5’s default to UCB.
Defendants’ third argument thus fails.
The Court now considers the merits of Great Oak’s Petition to confirm
the Final Award rendered by the arbitrator. Consistent with the statutory
framework, Great Oak made application to the Court to confirm the Final
Award by filing a petition “in the manner provided by law for the making and
hearing of motions[.]” [CV-69 Doc. 58]. 9 U.S.C. § 6. As required by 9
U.S.C. § 13, the party seeking to confirm an arbitration award must file with
the Clerk of Court certain documents, including but not limited to, the
agreement containing the arbitration clause, the award, and those papers
bearing upon the parties’ application to confirm, modify, or correct the
award submitted previously to any other court. Id. § 13(a)-(c). Great Oak,
in its Petition, adopted by reference the documents previously filed by
AHC5 in this matter. [CV-69 Docs. 1-1 to 1-21]. The Court concludes Great
Oak’s filings comply with 9 U.S.C. § 13 and establish the basis for
confirming the Final Award. As noted by the Fourth Circuit, there is little left
for this Court to do.
A confirmation proceeding under 9 U.S.C. § 9 is intended to be
summary: confirmation can only be denied if an award has
23
been corrected, vacated, or modified in accordance with the
Federal Arbitration Act. Under the Act, vacation of an award is
obtainable by serving a motion to vacate within three months of
the rendering of the award. 9 U.S.C. § 12.
Taylor v. Nelson, 788 F.2d 220, 225 (4th Cir. 1986).
While the Defendants, in one of the thirteen state court foreclosure
proceedings, filed a Motion to Vacate Arbitration Award [CV-69 Doc. 1-19]
under 9 U.S.C. § 10,8 they have not pursued that motion. They have now
changed course and concede that the “Final Award is final and conclusive
on the merits of all claims submitted to arbitration.” [CV-69 Doc. 63 at 4].
Any such motion to vacate has been abandoned.
In this forum, the
Defendants have chosen to pursue purely legal objections focusing on
whether this Court has the power to entertain Great Oak’s Petition, not
whether the Final Award is subject to vacatur or modification.9 Since the
Defendants have abandon any arguments concerning whether the Final
Award should be vacated, corrected, or modified, and since the Court has
8
Section 10 of the FAA sets forth the permissible grounds for seeking the vacatur of an
award. Such grounds include but are not limited to evidence showing that an award
was procured by fraud, the arbitrator was not impartial, the arbitrator engaged in
procedural misconduct during the arbitration, or the arbitrator exceeded her powers. 9
U.S.C. § 10(a)(1)-(4).
9
Section 11 of the FAA sets forth the permissible grounds for seeking modification of an
award. Such grounds include but are not limited to evidence showing that the award
contained material miscalculation of figures, the arbitrator awarded upon a matter not
submitted, or the award is imperfect in form not affecting the merits. 9 U.S.C. § 11(a)(c).
24
determined the Defendants’ legal challenges to be without merit, the Court
concludes that it must confirm the Final Award.
ORDER
Accordingly, IT IS, THEREFORE, ORDERED that the Motion to
Dismiss for Lack of Jurisdiction [CV-69 Doc. 66] filed in case number 12CV-69 on behalf of Respondents Marshall E. Cornblum, Madeline
Cornblum, Michael Cornblum, Carolyn Cornblum, and Longbranch
Properties, LLC, is DENIED and that Intervenor Great Oak NC Lender,
LLC’s Petition to Confirm Arbitration Award filed in case number 12-CV-69
[CV-69 Doc. 58] is GRANTED.
IT IS FURTHER ORDERED, pursuant to 9 U.S.C. §§ 2, 6, and 9, that
the Final Award of the Arbitrator [CV-69 Doc. 63-1] rendered September
20, 2010, is CONFIRMED as part of the Judgment of this Court.
In
accordance with the Final Award, Great Oak NC Lender, LLC shall have
and recover:
(a)
Against Respondents Marshall E. Cornblum and Madeline H.
Cornblum, jointly and severally, in the principal and interest amount of
25
$9,547,760.86, plus attorneys’ fees in the amount of $1,432,164.13, for a
total award of $10,979,924.99, and
(b) Against Respondents Longbranch Properties, LLC, Michael
Cornblum and Carolyn Cornblum, jointly and severally, in the principal and
interest amount of $3,922,923.00, plus attorneys’ fees in the amount of
$588,438.56, for a total award of $4,511,362.10, and
(c) For interest pursuant to 28 U.S.C. § 1961 on the amounts not yet
collected and still due and owing under paragraphs (a) and (b) above, from
September 20, 2010 until the date of collection.
IT IS ALSO ORDERED that Great Oak NC Lender, LLC’s Motions to
Consolidate Cases, to Stay Discovery, and to Stay the Case, all filed in
case number 12-CV-34 [CV-34 Docs. 61; 62; 63], are DENIED AS MOOT.
FINALLY, IT IS ORDERED that the amount of $10,979,924.99 owed
by Respondents Marshall Cornblum and Madeline Cornblum should be
offset by proceeds in the amount of $5,325,504.30 of which $2,947,419.20
should offset the amount of $4,511,362.10 owed by Respondents Michael
Cornblum, Carolyn Cornblum, and Longbranch Properties, LLC, and the
costs of both actions, case number 12-CV-34 and case number 12-CV-69,
shall be taxed to the Respondents, jointly and severally.
IT IS SO ORDERED.
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Signed: August 28, 2014
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