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Blue Water Bay at Center Hill, LLC v. Hasty

Court of Appeals of Tennessee, Nashville

November 27, 2017

BLUE WATER BAY AT CENTER HILL, LLC, ET AL.
v.
LARRY J. HASTY, ET AL.

          Session Date: August 15, 2017

         Appeal from the Chancery Court for Williamson County No. 43307 Deanna Johnson [1], Judge

         This appeal follows the trial court's confirmation of an arbitration award. There are four participating parties on appeal, the Appellant and three separate Appellees. With respect to the claims asserted by Appellee Blue Water Bay against the Appellant, we hereby vacate the trial court's orders and remand for further proceedings because the trial court erred in not allowing the Appellant pre-arbitration discovery regarding issues pertaining to arbitrability. With respect to the claims involving the other two Appellees, we reverse the trial court's orders due to the absence of a sufficient basis to establish arbitrability.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Vacated in part and Reversed in part and Remanded

          Ben M. Rose and Joshua D. Arters, Brentwood, Tennessee, for the appellant, Larry J. Hasty.

          William B. Hawkins, III and Eric G, Evans, Nashville, Tennessee, for the appellees, Blue Water Bay At Center Hill, LLC, and Edmond R. Queen.

          Trajan Carney, Nashville, Tennessee, for the appellee, Greyhawk Development Corporation.

          Arnold B. Goldin, J., delivered the opinion of the Court, in which Brandon O. Gibson and Kenny Armstrong, JJ., joined.

          OPINION

          ARNOLD B. GOLDIN, JUDGE

         BACKGROUND AND PROCEDURAL HISTORY

         This case involves a dispute among the Appellant, Larry Hasty ("Mr. Hasty"), and the Appellees, Blue Water Bay at Center Hill, LLC ("Blue Water"), Edmond Queen ("Mr. Queen"), and Greyhawk Development Corporation ("Greyhawk"). The genesis of the lawsuit lies in a 2007 loan granted to Greyhawk by Cadence Bank, N.A. ("Cadence"). Incident to Greyhawk's acquisition of loan proceeds from Cadence, which was evidenced by a promissory note in the amount of $3, 100, 000.00, Mr. Hasty, a corporate officer of Greyhawk, executed a personal guaranty. It is not disputed that Mr. Queen also signed a personal guaranty for payment of the same 2007 loan.

         As is relevant herein, Mr. Hasty's guaranty contained an arbitration provision. In pertinent part, the provision provided that "[a]ny controversy or claim between or among the parties hereto including, but not limited to, those arising out of or relating to this Guaranty or any related agreements or instruments . . . shall be determined by binding arbitration[.]" Following the execution of the 2007 note, the loan documents were allegedly amended and transferred multiple times.

         The present litigation commenced on July 1, 2014, when Blue Water and Mr. Queen filed a complaint in the Williamson County Chancery Court. The filed complaint set forth alternative counts for relief. Notably, the alternative claims that were advanced were not pursued jointly by the named Plaintiffs. That is, whereas the first count of the complaint was pursued exclusively by Blue Water, the alternative count was pursued exclusively by Mr. Queen. In the first count, Blue Water alleged that through a series of assignments of loan documents, it had become the holder of the most recent renewal of the original 2007 promissory note. It averred that because Greyhawk had not made any payments under the renewed note, Mr. Hasty was liable pursuant to his personal guaranty. Nevertheless, in recognition of the fact that Mr. Queen had also guaranteed payment of the note, Blue Water only sought to recover half of the loan amounts allegedly due and owing.

         In the alternative to Blue Water's request for relief, Mr. Queen asserted a claim for contribution. In advancing this claim, Mr. Queen asserted that Cadence had previously filed suit against himself, Mr. Hasty, and Greyhawk in regard to outstanding loan payments. According to Mr. Queen, Cadence agreed, following a mediation, to accept $1, 800, 000.00 in satisfaction of its claims. Because he had allegedly "paid the entire amount necessary to satisfy Cadence Bank's claims, " Mr. Queen sought to recover against his co-guarantor, Mr. Hasty, for contribution, having paid more than his pro-rata share.

          After several months passed without the filing of an answer, Blue Water and Mr. Queen moved for a default judgment against Mr. Hasty in December 2014. However, following the filing of an answer by Mr. Hasty on January 14, 2015, the motion for default was later stricken pursuant to an agreed order. In his answer, Mr. Hasty generally contended that the claims against him should be dismissed, and he stated that he was without sufficient information or knowledge to admit or deny Blue Water's status in relation to the renewed promissory note. In addition, Mr. Hasty filed a third-party complaint against Greyhawk, asserting claims for statutory and common law indemnity.

         Subsequent to the filing of Mr. Hasty's answer and third-party complaint, Greyhawk filed a motion to stay litigation pending arbitration pursuant to Tennessee's Uniform Arbitration Act, Tenn. Code Ann. § 29-5-301 et seq. In a legal memorandum filed contemporaneously with its motion to stay, Greyhawk noted that Mr. Hasty's guaranty contained a mandatory arbitration clause and contended that the claims in the lawsuit all arose out of the guaranty and related agreements. In response to Greyhawk's motion to stay, Mr. Hasty filed a motion to continue. Therein, Mr. Hasty contended that because he intended to challenge the arbitrability of his claims against Greyhawk, he was entitled to engage in pre-arbitration discovery prior to a hearing on the motion to stay. Mr. Hasty contended that discovery was necessary, in part, to verify the "litany of allegations" that Greyhawk had relied upon in support of its motion to stay. He further expressed a desire to challenge the validity of the specific arbitration clause sought to be enforced. Subsequent to Mr. Hasty's request for a continuance, Blue Water, Mr. Queen, and Greyhawk all filed responses disputing that any discovery was proper prior to a hearing on the motion to stay. Mr. Hasty thereafter filed a reply wherein he again noted that Tennessee law allows for pre-arbitration discovery.

         A hearing on Mr. Hasty's motion to continue was held on July 10, 2015. During the hearing, the trial court appeared to express a willingness to allow some discovery prior to determining the question of arbitrability, stating as follows: "I've already indicated my inclination is going to be to . . . allow discovery on the question of whether the arbitration provision pertaining to the guarant[y] even applies to the obligations created by these notes." Although the court indicated that Greyhawk's motion to stay was set to be heard on August 21, 2015, it suggested that this future setting might not ultimately be necessary. Speaking to Mr. Hasty's counsel regarding the motion to continue, the trial court stated as follows:

My ruling is that your motion is overruled. It's premature. You'll need to file a response to the motion to stay that's set for the 21st asking for leeway to take specific discovery. If you can fashion an order resulting from today's proceedings that's satisfactory, and not have to come here on the 21st, I'm happy to approve it. Because on the 21st I'm going to grant your client, Mr. Hasty, permission to pursue discovery on the question of whether the guarant[y], in fact, applies to these underlying obligations.

          In response to the trial court's comments, Mr. Hasty filed an application on August 7, 2015 seeking leave to pursue discovery regarding the arbitrability of his claims against Greyhawk. He also filed a "motion to sever" on that date, requesting that the claims filed by Blue Water and Mr. Queen be severed from his own claims against Greyhawk if necessary. On August 17, 2015, Blue Water, Mr. Queen, and Greyhawk filed responses to Mr. Hasty's August 7 filings. Blue Water and Mr. Queen also filed a separate response to Greyhawk's motion to stay, wherein they asserted that all matters between all parties should be resolved in arbitration.[2]

         On August 21, 2015, the trial court held a hearing on Greyhawk's motion to stay litigation and on Mr. Hasty's motion to sever and application for discovery. During the course of the hearing, which consisted entirely of argument of counsel, Mr. Hasty's counsel frequently expressed a desire to engage in discovery on the question of arbitrability. Although counsel for Greyhawk, Blue Water, and Mr. Queen indicated that papers attached to various court filings established Blue Water's status as a holder of the renewed promissory note and related loan documents, counsel for Mr. Hasty argued that he should be able to inquire into the legitimacy of the referenced transactions underpinning Blue Water's alleged status. We observe that the documents referenced by counsel for Greyhawk, Blue Water, and Mr. Queen were not actually introduced as evidence into the record at the August 21 hearing.

         Among the specific issues discussed at the hearing were some of the allegations pertaining to the alternative contribution claim asserted by Mr. Queen. As noted earlier, Mr. Queen's claim asserted that because he had "paid the entire amount necessary to satisfy Cadence Bank's claims, " he was entitled to recover against his co-guarantor, Mr. Hasty, for having paid more than his pro-rata share. During the hearing, Mr. Hasty's counsel expressed a desire to inquire into whether the loan obligations were previously extinguished before the alleged assignment to Blue Water. Counsel for Greyhawk argued to the trial court that, in light of the various referenced transactions, it was inaccurate to say that the underlying debt had been "paid off." According to Greyhawk's counsel, it was clear that Mr. Queen's company, PDQ Disposal, Inc., had purchased the note. In the trial court's view, answering this question was significant:

And that's critical. That's a critical question here. And either this Court or an arbitrator has got to look at that issue. If PDQ just paid it off, that's one thing. If PDQ bought it and took an assignment of the note and deed of trust or the note and trust and guarant[e]es, all the collateral, in other words, then it's a different problem. And I can't imagine, frankly, that the lat[t]er didn't occur. It would be hard for me to conceive that PDQ didn't simply buy it and take an assignment of the note and all the collateral that went with it. But that's a fact question that will have to be addressed by either this Court or an arbitrator.

         Although the trial court later suggested that this would be a question for the arbitrator and that the arbitrator would be able to set the parameters of discovery, counsel for Mr. Hasty argued that "when you're challenging arbitrability, you get to discover arbitrability in [the trial court]."

         Blue Water, Mr. Queen, and Greyhawk were not signatories to the guaranty containing the arbitration provision that was relied upon in support of the motion to stay, and Mr. Hasty simply wanted to be afforded some limited discovery to inquire into the various transactions that these parties were citing in support of their desire to arbitrate. Although the trial court found it "interesting" that there had been resistance to Mr. Hasty's desire to conduct discovery, it nevertheless expressed confusion as to why any discovery would be needed in light of the various documents that had been referenced by counsel for Blue Water, Mr. Queen, and Greyhawk. Mr. Hasty's counsel responded to the trial court's questioning on this issue by stating that, beyond the set of documents that had been referenced, Mr. Hasty should be able to explore whether those were actually legitimate transactions. Towards the conclusion of the hearing, the trial court stated that its inclination was to stay proceedings pending arbitration. Ultimately, however, it did not make a definitive ruling from the bench, and the matter was taken under advisement.

         On September 11, 2015, the trial court entered an order holding that it was proper to stay litigation and compel the parties to enter into arbitration concerning all raised claims. As a corollary to this determination, it denied Mr. Hasty's motion to sever and his application to pursue discovery. In reaching its decision that all claims should be arbitrated, the trial court made a number of factual findings regarding the loan documents and transactions that had been referenced during the August 21 hearing. As previously noted, while these documents were not introduced as proof, they had been attached to court papers filed by the parties seeking arbitration. Although a close inspection of the trial court's order reveals that it attempted to qualify its language in a couple of places regarding the documents relied on by Blue Water, Mr. Queen, and Greyhawk, [3] it nonetheless treated these documents as proof and accepted them at face value with regard to the legitimacy of the underlying transactions referenced therein. In the trial court's opinion, no discovery was required because there was no need for any additional documents.

          In making its findings, the trial court noted that Mr. Hasty's guaranty was assignable, and as such, it reasoned that an assignment of the guaranty would allow the assignee to enforce the guaranty's arbitration provision. Interestingly, however, despite the trial court's attempt to trace the purported transfer of the loan documents among various non-signatories to the guaranty, the resulting findings were seemingly irreconcilable. At one place in its order, for example, the trial court recited as follows: "PDQ Disposal subsequently assigned its Loan Documents to Mr. Queen. On December 31, 2013, Mr. Queen assigned all of [his] rights under these transactions to Blue Water." However, the trial court's order also contained a finding that Mr. Hasty's guaranty, which included the arbitration provision, was ultimately assigned to Mr. Queen: "Subsequently, PDQ Disposal, which held the Guaranty, then assigned the Guaranty to Blue Water, which assigned the Guaranty to Mr. Queen[.]"

         Although the trial court's specific reasoning is somewhat unclear in light of the apparent inconsistency of its findings, the trial court ultimately determined that every claim should be sent to arbitration because, in the view of the trial court, all claims were "intertwined" with Mr. Hasty's guaranty:

Although the Plaintiffs and Greyhawk are not signatories to Mr. Hasty's Guaranty, the rights of the Plaintiffs and the obligations of Greyhawk depend upon Mr. Hasty's rights and obligations under the Guaranty. The case is intertwined around the Guaranty, which contains the arbitration provision, so the Court finds it is proper to stay the litigation and compel the parties to enter into arbitration of all claims of all parties.

         Although Mr. Hasty requested permission to seek an interlocutory appeal following the trial court's September 11, 2015 order, the trial court denied his request.

         Arbitration subsequently ensued regarding the claims of all the parties. Although the arbitrator entered an award against Mr. Hasty in Blue Water's favor, the claims asserted by Mr. Queen and Mr. Hasty were dismissed. Proceedings in the trial court resumed soon thereafter. On July 7, 2016, Blue Water filed an application to confirm its arbitration award. On July 18, 2016, Mr. Hasty responded to Blue Water's application and moved to vacate the arbitration award.

         A hearing on Blue Water's application to confirm the arbitration award was later held on July 21, 2016. The trial court did not definitively rule on the application at that time, however, and on July 28, 2016, it entered an order stating that it would take the matter under advisement. In its July 28 order, the trial court informed Blue Water and Mr. Hasty that they could file additional replies to assist the court in making its ruling. On October 11, 2016, following the submission of additional filings by Mr. Hasty and Blue Water, the trial court entered an order confirming the arbitrator's award. This appeal followed.

          ISSUES PRESENTED

         In his brief, Mr. Hasty raises the following issues for review:

1. Whether the trial court erred in staying all claims of all parties in favor of arbitration;
2. Whether the trial court erred in denying the Appellant's request to take discovery regarding the arbitrability of the claims in this case; and,
3. Whether the trial court erred in granting [Blue Water's] Application for Confirmation of Arbitration Award and denying the ...

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