Barrow v. D.A.N. Joint Venture Properties of North Carolina, LLC

NO. COA13-975
NORTH CAROLINA COURT OF APPEALS
Filed: 4 March 2014
LARRY BARROW, LOIS BARROW, AND
DORIS MURPHREY,
Plaintiffs,
v. Greene County
No. 12 CVS 140
D.A.N. JOINT VENTURE PROPERTIES OF
NORTH CAROLINA, LLC, CONNIE
MURPHREY AND DONALD STOCKS,
Defendants.
Appeal by D.A.N. Joint Venture Properties of North
Carolina, LLC from orders entered 10 May 2013 and 15 May 2013 by
Judge Paul L. Jones in Greene County Superior Court. Heard in
the Court of Appeals 6 January 2014.
White & Allen, P.A., by John P. Marshall and Ashley C.
Fillippeli, for plaintiffs-appellees.
Driscoll Sheedy, P.A., by Susan E. Driscoll, for defendant-
appellant D.A.N. Joint Venture Properties of North
Carolina, LLC.
Miller & Audino, LLP, by Jeffrey L. Miller, for defendant-
appellee Donald Stocks.
MARTIN, Chief Judge.
D.A.N. Joint Venture Properties of North Carolina, LLC
appeals from two superior court orders denying D.A.N. Joint
Venture’s motion for summary judgment and granting Larry
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Barrow’s, Lois Barrow’s, Doris Murphrey’s, and Donald Stocks’s
motions for summary judgment.
The facts relevant to appeal are that Larry Barrow, Lois
Barrow, Doris Murphrey, Connie Murphrey, and Donald Stocks
(guarantors) are all parties to a guaranty agreement
guaranteeing notes issued by Wachovia Bank, N.A. to L.L.
Murphrey Company. In 2000, L.L. Murphrey filed a Chapter 11
petition with the United States Bankruptcy Court for the Eastern
District of North Carolina. At the time the petition was filed,
L.L. Murphrey was in default on several Wachovia notes that were
guaranteed by the guarantors. On 4 May 2001, L.L. Murphrey
filed its Fourth Amended Plan of Reorganization with the
bankruptcy court, which was later confirmed by the bankruptcy
court in part because the “guarantors contributed $550,000 to
[L.L. Murphrey] to make confirmation of its plan feasible.”
The Plan of Reorganization divided L.L. Murphrey’s Wachovia
debts into two notes: Note A and Note B. Wachovia sold Note A
and Note B to Cadlerock Joint Venture, L.P., which later sold
the notes to D.A.N. Joint Venture. In addition to creating two
notes, the Plan of Reorganization provided that the “guaranties
will remain in full force and effect for the Notes except as
adjusted to reflect the amount of Recapitalized Debt, defined
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herein.”
Because L.L. Murphrey and D.A.N. Joint Venture could not
agree on the amount of the recapitalized debt, L.L. Murphrey
filed a motion with the bankruptcy court to reopen the Chapter
11 case on 1 April 2011. L.L. Murphrey, Larry Barrow, Lois
Barrow, and Doris Murphrey then filed an adversary proceeding,1
before the bankruptcy court, against D.A.N. Joint Venture. In
the adversary proceeding, Larry Barrow, Lois Barrow, and Doris
Murphrey sought a declaration that the guarantors were
contingently liable for only the amount of the recapitalized
debt. They also requested an injunction requiring D.A.N. Joint
Venture to stop demanding payment from L.L. Murphrey and the
guarantors in excess of the amount of the recapitalized debt.
In an order entered on 16 December 2011, the bankruptcy
court found that the amount of the recapitalized debt was
$6,186,362. D.A.N. Joint Venture filed a motion with the
bankruptcy court seeking reconsideration of the 16 December 2011
order, which was not a final order because it did not resolve
all of the claims between the parties. The bankruptcy court
granted D.A.N. Joint Venture’s motion. On 10 May 2012, the
1
An adversary proceeding is a “lawsuit that is brought within a
bankruptcy proceeding, governed by special procedural rules, and
based on conflicting claims.” Black’s Law Dictionary 58 (8th
ed. 2004).
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bankruptcy court issued a second order denying the claim for
injunctive relief, because there was no showing of irreparable
harm, and declaring that the liability of guarantors was capped
at the amount of the recapitalized debt.
The present action was filed by Larry Barrow, Lois Barrow,
and Doris Murphrey against D.A.N. Joint Venture, Connie
Murphrey, and Donald Stocks in superior court after the 10 May
2012 bankruptcy court order was entered. Larry Barrow, Lois
Barrow, and Doris Murphrey assert that they are entitled to a
declaration that the expiration of the statute of limitations
prevents D.A.N. Joint Venture from asserting any claims against
the guarantors based on the guaranties. D.A.N. Joint Venture
counterclaimed and crossclaimed that the guarantors were in
breach of the guaranty agreements as modified by the Plan of
Reorganization. The parties then filed cross-motions for
summary judgment. D.A.N. Joint Venture appeals from the
superior court’s grant of Larry Barrow’s, Lois Barrow’s, Doris
Murphrey’s, and Donald Stocks’s motions for summary judgment.
_________________________
On appeal, D.A.N. Joint Venture argues that the 10 May 2012
bankruptcy court order, which addressed the guarantors’
liability under the Plan of Reorganization, precluded the trial
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court from granting summary judgment on the grounds that the
statute of limitations bars all claims asserted by D.A.N. Joint
Venture against the guarantors based on the guaranties. We
agree.
Summary judgment is appropriate when “there is no genuine
issue as to any material fact and . . . any party is entitled to
a judgment as a matter of law.” In re Will of Jones, 362 N.C.
569, 573, 669 S.E.2d 572, 576 (2008) (internal quotation marks
omitted). We apply a de novo standard of review when evaluating
a trial court’s grant of summary judgment. Id. Under de novo
review, we “consider[] the matter anew and freely substitute
[our] own judgment for that of the lower tribunal.” State v.
Williams, 362 N.C. 628, 632–33, 669 S.E.2d 290, 294 (2008)
(internal quotation marks omitted).
To resolve this interjurisdictional preclusion issue, which
involves the preclusive effect of a bankruptcy court order in
superior court, we must first determine whether state or federal
law applies. In Semtek International Inc. v. Lockheed Martin
Corp., 531 U.S. 497, 506–09, 149 L. Ed. 2d 32, 41–43 (2001), the
Supreme Court of the United States considered whether federal or
state law controls the claim-preclusive effect of a federal-
court judgment based on diversity jurisdiction in a later state-
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court proceeding. From the outset, the Court noted that
“[n]either the Full Faith and Credit Clause, U.S. Const., Art.
IV, § 1, nor the full faith and credit statute, 28 U.S.C. §
1738, address the question. By their terms they govern the
effects to be given only to state-court judgments.” Id. at 506–
07, 149 L. Ed. 2d at 41–42. Furthermore, there is “no other
federal textual provision, neither of the Constitution nor of
any statute, [that] addresses the claim-preclusive effect of a
judgment in a federal diversity action,” or “the claim-
preclusive effect of a federal-court judgment in a federal-
question case.” Id. at 507, 149 L. Ed. 2d at 42. Federal-
question cases, however, have a preclusive effect on later
proceedings because the Court “has the last word on the claim-
preclusive effect of all federal judgments,” and requires that
federal-question cases be given preclusive effect. Id. Federal
common law, therefore, governs the claim-preclusive effect of
federal-court judgments. See id. at 508, 149 L. Ed. 2d at 42.
In this case, defendant argues that the bankruptcy court
order must be given preclusive effect. Therefore, we look to
federal common law to determine the preclusive effect of the
bankruptcy court order.2
2
To assist in our determination of federal common law, we find
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Because the terminology used to describe the preclusive
effect of prior adjudications can be inconsistent, we begin by
defining the terms. “[R]es judicata generally refers to the law
of former adjudications,” In re Varat Enters., Inc., 81 F.3d
1310, 1315 n.5 (4th Cir. 1996), and “encompasses two concepts:
claim preclusion and issue preclusion, or collateral estoppel.”
Id. at 1315. Both claim preclusion and issue preclusion apply
to bankruptcy court orders. See id. (“The doctrine of res
judicata applies in the bankruptcy context.”).
Claim preclusion occurs when a suit——which arises from the
same cause of action as a second suit——precludes relitigation in
a second suit of matters actually decided and every claim that
might have been raised in the first suit. Id. (citing Nevada v.
United States, 463 U.S. 110, 129–30, 77 L. Ed. 2d 509, 524
(1983)). Issue preclusion on the other hand, applies when the
first suit and the second suit involve different causes of
action, but involve some of the same factual or legal issues.
Id. In this situation, issue preclusion prevents relitigation,
in the second suit, of the legal and factual issues actually and
necessarily decided in the first suit. See id. Thus, the key
the common law of the Fourth Circuit Court of Appeals persuasive
because it is the circuit in which the United States Bankruptcy
Court for the Eastern District of North Carolina is located.
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difference between claim and issue preclusion is whether the
first suit and the second suit involve the same cause of action.
We believe that the adversary proceeding and the superior
court proceeding involve the same cause of action and therefore
consider whether claim preclusion applies to this case. Before
addressing the requirements of claim preclusion, however, we
must address whether claim preclusion applies to a declaratory
judgment.
Generally, the preclusive effect of declaratory judgments
is limited to matters “actually litigated by the parties and
determined by a declaratory judgment.” 18A Charles Allen
Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice
and Procedure § 4446 (2d ed. 2002). Thus, issue preclusion
clearly applies to declaratory judgments. Federal courts,
however, have consistently held that the general rule limiting
the preclusive effect of declaratory judgments to issue
preclusion “applies only if the prior action solely sought
declaratory relief.” Laurel Sand & Gravel, Inc. v. Wilson, 519
F.3d 156, 164 (4th Cir. 2008). As a result, if a claimant seeks
coercive relief, like an injunction, in addition to declaratory
relief, then the claimant forfeits the ability to limit the
preclusive effect of a declaratory judgment to issue preclusion.
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Id. (quoting Stericycle, Inc. v. City of Delavan, 929 F. Supp.
1162, 1164 (E.D. Wis. 1996) (citing Cimasi v. City of Fenton,
838 F.2d 298, 299 (8th Cir. 1988) and Mandarino v. Pollard, 718
F.2d 845, 848 (7th Cir. 1983))). Accordingly, claim preclusion
also applies to the bankruptcy court order in this instance
because Larry Barrow’s, Lois Barrow’s, and Doris Murphrey’s
complaint in the adversary proceeding sought injunctive relief
in addition to declaratory relief.
Claim preclusion applies to an adjudication when (1) a
court of competent jurisdiction enters a final judgment on the
merits; (2) there is a second suit involving the claimants or
parties in privity with the claimants; and (3) the claims in the
second suit are based on the same cause of action as the first
suit or could have been asserted in the first suit. Varat, 81
F.3d at 1315; Bockweg v. Anderson, 333 N.C. 486, 492, 428 S.E.2d
157, 161 (1993). In this case, all three criteria are
satisfied.
To analyze the first criterion for claim preclusion, we
divide it into three subparts. Subpart one requires a court of
competent jurisdiction. Subpart two requires a final judgment.
Subpart three mandates that the final judgment be on the merits.
First, Larry Barrow, Lois Barrow, and Doris Murphrey assert
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that the bankruptcy court was not a court of competent
jurisdiction. They argue that the bankruptcy court lacked
subject-matter jurisdiction over the claims asserted in the
adversary proceeding because they were not core bankruptcy
proceedings. While federal courts are courts of limited
jurisdiction, federal courts have the power to decide whether
they have jurisdiction; their determination of jurisdiction may
be appealed, but it may not be collaterally attacked. In re
Bulldog Trucking, Inc., 147 F.3d 347, 352 (4th Cir. 1998).
In the adversary proceeding, the 10 May 2012 bankruptcy
court order stated:
[T]his adversary proceeding is a core
proceeding within the meaning of 28 U.S.C. §
157(b)(2). . . . Matters related to
interpreting or implementing a plan post-
conformation are still considered “core”
even in light of the Supreme Court’s ruling
in Stern v. Marshall, __ U.S. __, 131 S. Ct.
2594 (2011).
Furthermore, the bankruptcy court stated: “The provisions of
this plan modifying guaranties are completely consistent with
applicable law at the time of confirmation, particularly since 7
contributed $550,000 to the debtor to make confirmation of its
plan feasible.” Therefore, the bankruptcy court was a court of
competent jurisdiction because it was conducting a core
bankruptcy proceeding.
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Next, Larry Barrow, Lois Barrow, and Doris Murphrey assert
that the bankruptcy court could not issue a final order because
the adversary proceeding involved a noncore proceeding that
required the consent of the parties before the bankruptcy court
could issue a final order. As discussed above, the bankruptcy
court had subject-matter jurisdiction over the adversary
proceeding because it was a core proceeding. The bankruptcy
court, therefore, could issue a final judgment. See Stern v.
Marshall, __ U.S. __, __, 180 L. Ed. 2d 475, 488 (“Bankruptcy
judges may hear and enter final judgments in all core
proceedings arising under title 11, or arising in a case under
title 11.” (internal quotation marks omitted)), reh’g denied, __
U.S. __, 180 L. Ed. 2d 924 (2011).
Not only did the bankruptcy court have the power to issue a
final judgment but it entered a final judgment. “[A] judgment
will ordinarily be considered final in respect to a claim . . .
if it is not tentative, provisional, or contingent and
represents the completion of all steps in the adjudication of
the claim by the court.” Restatement (Second) of Judgments § 13
cmnt.b (1982). The 10 May 2012 bankruptcy court order completed
all steps in the adjudication of the adversary proceeding. This
is clear from the order for two reasons. First, it disposed of
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all of the claims between the parties. Second, one of the
reasons the bankruptcy court granted the motion for
reconsideration was for the purpose of entering an “indisputably
final [order] for purposes of appeal.” Therefore, the 10 May
2012 order is a final judgment.
Finally, “judgment on the merits” is a term of art that
means a judgment was “‘based on legal rights as distinguished
from mere matters of practice, procedure, jurisdiction or
form.’” In re Gilson, 250 B.R. 226, 236 (Bankr. E.D. Va. 2000)
(quoting Fairmont Aluminum Co. v. Comm’r of Internal Revenue,
222 F.2d 622, 625 (4th Cir. 1955)). There is no dispute that
the bankruptcy court order was rendered on the merits. All
parties to the adversary proceeding were able to appear before
the bankruptcy court at a hearing on 21 November 2011, where
they could raise issues and make legal arguments. Thus, the
final judgment was on the merits because it was based on the
parties’ legal rights.
Next, we address whether the superior court suit involves
the same claimants or those in privity with the claimants in the
adversary proceeding. See Varat, 81 F.3d at 1315. In the
adversary proceeding, L.L. Murphrey, Larry Barrow, Lois Barrow,
and Doris Murphrey sued D.A.N. Joint Venture. In the superior
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court proceeding, Larry Barrow, Lois Barrow, and Doris Murphrey
sued D.A.N. Joint Venture and joined Connie Murphrey and Donald
Stocks as defendants. However, for purposes of this appeal,
Donald Stocks is treated the same as Larry Barrow, Lois Barrow,
and Doris Murphrey for determining whether claim preclusion
applies to the statute of limitations argument.
Larry Barrow, Lois Barrow, and Doris Murphrey asserted
claims against D.A.N. Joint Venture in both proceedings, and
claim preclusion should apply to them. Thus, the only issue is
whether Donald Stocks is in privity with Larry Barrow, Lois
Barrow, and Doris Murphrey.
Privity exists when a non-party to a former adjudication is
“so identified in interest with a party to former litigation
that [the non-party has] . . . precisely the same legal right in
respect to the subject matter involved.” Martin v. Am.
Bancorporation Ret. Plan, 407 F.3d 643, 651 (4th Cir. 2005)
(internal quotation marks omitted). That is, “the relationship
between the one who is a party on the record and another is
close enough to include that other within the res judicata.”
Id. (internal quotation marks omitted). As discussed earlier,
Donald Stocks, Larry Barrow, Lois Barrow, and Doris Murphrey are
all parties to a guaranty agreement and both lawsuits address
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the liability of guarantors. Therefore, Donald Stocks is in
privity with Larry Barrow, Lois Barrow, and Doris Murphrey
because they share the same legal rights with respect to the
guaranty agreements.
Finally, we must address whether the adversary proceeding
and the superior court proceeding involve the same cause of
action. See Varat, 81 F.3d at 1315. The Fourth Circuit, for
the purpose of claim preclusion, has defined a cause of action
as all claims that arise “out of the same transaction or series
of transactions.” Pittston Co. v. United States, 199 F.3d 694,
704 (4th Cir. 1999) (internal quotation marks omitted).
“Transaction” in this context “connotes a natural grouping or
common nucleus of operative facts.” Id. (internal quotation
marks omitted).
We examine the adversary proceeding and the superior court
proceeding to determine if the claims asserted or which could
have been asserted in each case arise from a common nucleus of
operative facts. In the adversary proceeding, Larry Barrow,
Lois Barrow, and Doris Murphrey sought a declaration from the
bankruptcy court that guarantors were contingently liable for
only the amount of the recapitalized debt. Nothing precluded
guarantors from asserting that they were absolved from liability
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on statute of limitations grounds. The claim actually asserted
in the adversary proceeding focused on how the Plan of
Reorganization impacted the legal relationship between
guarantors and D.A.N. Joint Venture. In fact, the bankruptcy
court considered the language of the Plan of Reorganization in
reaching its holding that guarantors were entitled to a
declaration that “the liability of pre-petition guarantors is
capped at the amount of the Recapitalized Debt.”
In the superior court proceeding, Larry Barrow, Lois
Barrow, and Doris Murphrey sought a declaration, and Donald
Stocks relied on the affirmative defense, that the statute of
limitations bars any claims that D.A.N. Joint venture might
assert against guarantors based on the guaranty agreements. The
logic of this argument is that the Plan of Reorganization
required Wachovia to prepare new loan documents, which Wachovia
apparently never prepared. As a result, they argue, that the
only guaranty agreements are those executed before the Chapter
11 bankruptcy, and the statute of limitations bars enforcement
of the guaranty agreements because Wachovia notified guarantors
that they were in default under the guaranty agreements sometime
prior to the filing of the Chapter 11 bankruptcy petition.
However, it is clear that the Plan of Reorganization has
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some impact on the guaranty agreements because it states:
“guaranties will remain in full force and effect for the Notes
except as adjusted to reflect the amount of the Recapitalized
Debt, defined herein.” Thus, the central focus of Larry
Barrow’s, Lois Barrow’s, Doris Murphrey’s, and Donald Stocks’s
superior court arguments is how the Plan of Reorganization
affected the legal relationship between guarantors and D.A.N.
Joint Venture. This statute of limitations claim could have
been asserted in the adversary proceeding. Consequently, the
adversary proceeding and the superior court proceeding arise
from the same cause of action because they both focus on how the
Plan of Reorganization affects the legal relationship between
guarantors and D.A.N. Joint Venture and the claims that were
available to guarantors.
To summarize, claim preclusion applies to the 10 May 2012
bankruptcy court order because the claimants in the adversary
proceeding asked for an injunction in addition to declaratory
relief. Next, the bankruptcy court was a court of competent
jurisdiction that issued a final judgment on the merits because
there was a hearing concerning the substance of the legal issues
in dispute between the parties on a core proceeding as well as
an order disposing of all claims between claimants. Also, the
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adversary proceeding and the superior court proceeding involved
the guarantors asserting rights against D.A.N. Joint Venture,
thus both cases involved the same claimants. Finally, both
cases arose from the same cause of action because both cases
focused on how the Plan of Reorganization impacts the
relationship of guarantors and D.A.N. Joint Venture and nothing
prevented guarantors from asserting their statute of limitations
claim in the adversary proceeding. Therefore, Larry Barrow’s,
Lois Barrow’s, and Doris Murphrey’s failure to raise the statute
of limitations issue during the adversary proceeding precludes
us from now considering whether the statute of limitations
prevents defendant from recovering from the guarantors.
Accordingly, we reverse the superior court’s order and
remand the case to the superior court for a determination of the
amount of the guarantors’ liability.
Reversed and remanded.
Judges ERVIN and McCULLOUGH concur.