Trustee’s Breach of Contract Claims Head to Arbitration

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By Diane Davis

A trustee’s claims outside of bankruptcy against Wall & Assocs., Inc., which provided services to the debtors to minimize their tax liability, should go to arbitration, a bankruptcy court in Alabama held Jan. 30 ( Carn v. Wall & Assocs. (In re Tomberlin) , 2017 BL 26935, Bankr. M.D. Ala., No. Adv. Proc. 16-01115, 1/30/17 ).

The trustee’s claims rely on an agreement the parties had as part of their business arrangement calling for arbitration to resolve any disputes. Compelling arbitration, then, would “achieve a centralized resolution and prevent piecemeal litigation,” Judge Dwight H. Williams, Jr. of the U.S. Bankruptcy Court for the Middle District of Alabama wrote.

The Federal Arbitration Act (FAA) favors arbitration, the court said, citing Whiting-Turner Contracting Co. v. Electric Machinery Enterprises, Inc. (In re Electric Machinery Enterprises, Inc.) , 479 F.3d 791 (11th Cir. 2007).

To determine whether a claim must be submitted to arbitration, courts look at the nature of the claim—"core” or “non-core,” the court said.

Core proceedings involve those involving a right created by federal bankruptcy law or those that would arise only in bankruptcy, the court said. Non-core proceedings are outside of bankruptcy.

The trustee’s breach of contract claim alleged that the amount paid by John and Jan Tomberlin greatly exceeded the value of the services rendered to minimize taxes, penalties, and interest owed to the Alabama Department of Revenue and the Internal Revenue Service, the court said. The breach of contract claim is a non-core claim, the court said.

Separate, fraudulent transfer and turnover claims are core claims, but they are directly connected to the facts underlying the breach-of-contract claim, the court said.

Enforcing arbitration for the predominantly breach-of-contract claim doesn’t inherently conflict with the underlying purposes of the Bankruptcy Code, the court said.

The two core claims are essentially extensions of the non-core breach-of-contract claim, the court said.

Espy, Metcalf & Espy, P.C., and Baker Donelson Bearman Caldell & Berkowitz represented the trustee; Sirote & Permutt, P.C., represented Wall & Associates, Inc.; Espy, Metcalf & Espy, P.C., represented the debtors.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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