SEIBEL, District Judge.
Before the Court is the appeal of Grocery Haulers, Inc. ("GHI" or "Appellant") from the Bankruptcy Court's Order ("Final Order")
Appellant first gained a role in the grocery store operations of The Great Atlantic & Pacific Tea Company, Inc. ("A & P") and certain of its affiliates (collectively "Appellees" or "Debtors") when A & P acquired Pathmark Stores, Inc. ("Pathmark") in 2007. (See Bankr. Doc. 671 Ex. 1 ¶ 4.)
At the time that A & P acquired Pathmark, A & P had its own separate supply and logistics contract with C & S, so A & P and C & S entered into a new agreement to integrate the two contracts. (See Bankr. Doc. 660 ¶ 15; Bankr. Doc. 671 Ex. 1 ¶¶ 3, 5.) The new agreement, however, left the legacy Trucking Agreement between Pathmark and Appellant in place. (Bankr. Doc. 671 Ex. 1 ¶ 5.) Separately, C & S had its own trucking contract with Appellant (the "C & S Contract"), pursuant to which Appellant delivered merchandise to other of C & S's non-Pathmark customers, including A & P. (Id.) C & S's warehouse facilities located near Woodbridge, New Jersey (the "Woodbridge Facilities") were an integral part of Appellees' supply base, and held the bulk of merchandise that C & S procured and GHI transported for Pathmark-branded stores. (See Bankr. Doc. 660 ¶¶ 15, 17; Bankr. Doc. 660 Ex. 1 ¶ 7; Bankr. Doc. 671 Ex. 1 ¶¶ 2, 5.)
Appellees commenced their bankruptcy case on December 12, 2010 by filing a voluntary petition for relief under chapter 11 of the Bankruptcy Code. (Bankr. Doc. 1.) After analyzing their finances at that time, Appellees felt that they were burdened by high costs. (See Bankr. Doc. 671 ¶¶ 1-2; Bankr. Doc. 671 Ex. 1 ¶¶ 7-9.) Specifically, Appellees maintained that they were paying substantially more for services under the Trucking Agreement than they could negotiate with other vendors in the marketplace, because it was a "cost-plus" contract under which Appellees were covering both operational and administrative costs. (See Bankr. Doc. 671 Ex. 1 ¶¶ 6-9.) Additionally, in early 2011, C & S publicly announced its intention of closing the Woodbridge Facilities as of February 6, 2011, which would have required the supply and distribution volume previously handled for Appellees there to be moved hundreds of miles from the bulk of Appellees' stores, further increasing costs under the Trucking Agreement. (See Bankr. Doc. 660 ¶¶ 17-18; Bankr. Doc. 671 Ex. 1 ¶ 8.) As a result, Appellees conducted a bidding process, which included Appellant, C & S, and a few other vendors, for a contract to take over the services previously covered under the Trucking Agreement. (See Bankr. Doc. 660 ¶¶ 20-22; Bankr. Doc. 671 Ex. 1 ¶¶ 9-10.) At the same time, in the alternative, Appellees attempted —without success—to negotiate with Appellant for changes to the Trucking Agreement. (See Bankr. Doc. 660 ¶ 19.) Ultimately, C & S submitted a proposal to Appellees that was less expensive and more favorable than Appellant's best bid, especially because it included the transportation services that Appellant had previously provided under the C & S Contract. (See Bankr. Doc. 671 Ex. 1 ¶¶ 10-15.)
On January 18, 2011, Appellees moved pursuant to Section 365 of the Bankruptcy Code to reject the Trucking Agreement (the "Rejection Motion"). (See Bankr. Doc. 545.) Appellant objected to the Rejection Motion on January 28, 2011, and argued that if the Trucking Agreement was terminated, Appellant would be forced to lay off hundreds of employees without being able to provide proper sixty-day notice under the federal Worker Adjustment and Retraining Notification Act ("WARN Act"), 29 U.S.C. §§ 2101-2109, and the Millville Dallas Airmotive Plant Job Loss Notification Act, N.J. Stat. Ann. §§ 34:21-1-21-7, (collectively "WARN Acts"). (See Bankr. Doc. 660.) On February 2, 2011, the Bankruptcy Court heard oral argument on the Rejection Motion from Appellant, Appellees, Appellees' Official Committee of Unsecured Creditors, C & S, and Local 863 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen
On February 3, 2011, prior to the Bankruptcy Court's entry of its order on the Rejection Motion (the "Rejection Order"), GHI filed a notice of appeal and emergency motion to stay the entry of the Rejection Order (the "Emergency Stay Motion"). (See Bankr. Doc. 714.) At a telephonic hearing held on February 4, 2011, the Bankruptcy Court denied the Emergency Stay Motion, (see Bankr. Doc. 989 at 33:18-45:9), and on the same day entered the Rejection Order, (see Bankr. Doc. 721), authorizing Appellees to reject the Trucking Agreement, after finding that rejection was within Appellees' sound business judgment and in their best interest, (see id. at 2; Bankr. Doc. 988 at 125:18-129:4).
On February 6, 2011, the rejection of the Trucking Agreement became effective, Appellees commenced their replacement transportation arrangement with C & S, and C & S terminated a portion of the C & S Contract under which Appellant delivered perishable foods to A & P and Waldbaum's stores operated by Appellees. (See Bankr. Doc. 1387 ¶ 11.) As a result of the Rejection Order, Appellant was forced to lay off more than 220 hourly and salaried employees, including employees represented by Local 863, without providing sixty-day notice of termination of the Trucking Agreement to those employees as required by the WARN Acts.
On or about March 21, 2011, Local 863 commenced litigation against Appellant in the United States District Court for the District of New Jersey (the "New Jersey Action") alleging that, among other things, Appellant was liable for violations of the WARN Acts and for severance pay under certain collective bargaining agreements. (See Bankr. Doc. 1163 Ex. A.) In turn, on March 31, 2011, Appellant filed a motion (the "Relief Motion") in the Bankruptcy Court requesting a determination that the automatic stay did not apply to certain claims that it sought to assert against A & P through a third-party complaint in the New Jersey Action or, in the alternative, relief from the automatic stay so that it could file the third-party complaint. (See Bankr. Doc. 1163.) The causes of action that GHI sought to assert against A & P included a claim that A & P was responsible for the WARN Acts violations as "controlling employer," a tortious interference claim, and other claims that Appellant does not discuss on appeal. (See Proposed Third-Party Compl. 26-41.)
The Bankruptcy Court heard argument regarding Appellant's Relief Motion on April 28, 2011. (See Hr'g Tr.)
This Court has jurisdiction to hear appeals from decisions of a bankruptcy court pursuant to 28 U.S.C. § 158(a), which provides in pertinent part that "[t]he district courts of the United States shall have jurisdiction to hear appeals . . . from final judgments, orders, and decrees;. . . [and,] with leave of the court, from other interlocutory orders and decrees . . . of bankruptcy judges." 28 U.S.C. § 158(a). A district court reviews a bankruptcy court's findings of fact for clear error and reviews its legal conclusions de novo. Overbaugh v. Household Bank, N.A. (In re Overbaugh), 559 F.3d 125, 129 (2d Cir.2009); see Fed. R. Bankr.P. 8013 (district court may "affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree," and "[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous"). A bankruptcy court's equitable discretion—such as its determination on a motion to lift the automatic stay—is reviewed for abuse of discretion. New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. (In re Dairy Mart Convenience Stores, Inc.), 351 F.3d 86, 91 (2d Cir.2003). "An abuse of discretion may consist of an error of law or a clearly erroneous finding of fact, or a decision that, though not necessarily the product of a legal error or a clearly erroneous factual finding[,] cannot be located within the range of permissible decisions." Jasco Tools, Inc. v. Dana Corp. (In re Dana Corp.), 574 F.3d 129, 145 (2d Cir.2009) (alteration in original) (citations and internal quotation marks omitted).
Under Section 365 of the Bankruptcy Code, subject to the bankruptcy court's approval, a debtor has the option to assume or reject any executory contract— that is, a contract requiring further performance from each party—any time after the commencement of a bankruptcy case and before the confirmation of the plan of reorganization. See 11 U.S.C. § 365(a), (d)(2). The rejection of an executory contract in bankruptcy "constitutes a breach of such contract . . . immediately before the date of the filing of the petition." Id. § 365(g)(1). Courts have characterized Section 365(g) as a "legal fiction," but indulge the fiction because executory contracts are entered into pre-petition and thus impose pre-petition obligations on both parties. See In re Mace Levin Assocs., Inc., 103 B.R. 141, 144 (Bankr. N.D.Ohio 1989); see also In re Old Carco LLC, 424 B.R. 633, 639-40 (Bankr. S.D.N.Y.2010) ("[E]ncumbering a debtor with a post-petition obligation would seriously undercut the entire purpose of the rejection process. Requiring administrative priority for obligations that were first undertaken pre-petition is exactly what the rejection provisions are supposed to avoid.") (citation and internal quotation marks omitted). The purpose of Section 365 is to enable a debtor to relieve itself of burdensome obligations that may impede
Under Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition operates as a stay against, among other things, "the commencement . . . of a judicial . . . proceeding against the debtor that . . . could have been commenced before the commencement of the case." 11 U.S.C. § 362(a)(1). The automatic stay provides a debtor with breathing room from the claims of its creditors, and "allows the bankruptcy court to centralize all disputes concerning property of the debtor's estate in the bankruptcy court so that reorganization can proceed efficiently, unimpeded by uncoordinated proceedings in other arenas." Shugrue v. Air Line Pilots Ass'n, Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 989 (2d Cir.1990). "The scope of the automatic stay is broad and is a fundamental debtor protection that not only protects debtors but protects creditors as well." Enron Corp. v. Cal. ex rel. Bill Lockyer (In re Enron Corp.), 314 B.R. 524, 533-34 (Bankr.S.D.N.Y.2004) (citations omitted). Because, as stated above, a rejected executory contract is deemed breached immediately before the filing of the bankruptcy petition, it follows that, because of Section 362, damages claims that flow from the rejection of an executory contract are stayed by the automatic stay. See 11 U.S.C. §§ 362(a)(1), 365(g)(1); First Fiscal Fund Corp. v. Fishers Big Wheel, Inc., 36 B.R. 299, 302 (Bankr.E.D.N.Y.1984); see also In re Old Carco LLC, 424 B.R. at 639 (breach of executory contract treated as pre-petition claim that is afforded general unsecured status).
On appeal, Appellant argues that the Bankruptcy Court erred in finding that (1) the WARN Acts and tortious interference claims arose pre-petition and (2) Appellant's proposed third-party claim seeking declaratory judgment that A & P is the controlling employer of Appellant's employees was a common law contribution claim that the Bankruptcy Court—not the New Jersey district court—should adjudicate. (See Appellant's Br., (Doc. 7), 11-12; Appellant's Reply Br., (Doc. 10), 3-6.) Appellees argue that the Bankruptcy Court properly held that the claims in Appellant's proposed third-party complaint were essentially rejection damages claims that arose out of the parties' pre-petition relationship and are inseparable from the rejection of the Trucking Agreement. (See Appellees' Br., (Doc. 8), 10-14.)
Appellant has not persuaded this Court that its claims relating to the WARN Acts violations or tortious interference with contract are post-petition claims to which the automatic stay does not apply. First, regarding the WARN Acts claims, absent the rejection of the contract here, Appellant would not have had to lay off its employees, or, at the very least, would have been able to comply with the WARN Acts' notification requirements. Appellant's damages—liability to the members of Local 863 for WARN Acts violations— are thus predicated on the rejection of the contract, which is treated under the Code as arising immediately before the petition date, even though the actual act of rejection occurred post-petition, see Fed. Realty Inv. Trust v. Park (In re Park), 275 B.R. 253, 256 (Bankr.E.D.Va.2002) ("Even though the act of rejection takes place after the date of the bankruptcy filing, the breach (with certain exceptions) is treated as occurring on the date of the bankruptcy filing."), and are stayed by the automatic stay.
Second, Appellant's tortious interference claim is intimately tied to its claim that Appellees are liable for the WARN Acts violations.
On review of the record, I do not find any legal or clear factual error in the conclusion that Appellant's claims arose pre-petition under Section 365(g) because they flowed directly from Appellees' rejection of the Trucking Agreement, and are thus stayed by the automatic stay. I understand Appellant's frustration that it is prevented by the automatic stay from bringing a suit it could not have brought pre-petition, but that occurs whenever a party seeks damages from the rejection of a contract. Appellant will have to settle for the remedies available to it in the Bankruptcy Court.
Next, Appellant argues that the Bankruptcy Court erred in finding that Appellant's claim against A & P was for contribution, rather than a claim based on primary liability as a "controlling employer" or "joint employer" within the meaning of the WARN Acts. (See Appellant's Br. 11-12.) Appellees argue that the Bankruptcy Court properly characterized the claims as seeking contribution because Local 863 or a unit of local government are the only entities that can assert a claim of primary liability under the WARN Acts, and Local 863 here asserted claims solely against Appellant. (See Appellees' Br. 14.)
It is unclear what legal significance Appellant attributes to the classification of its claim as one for primary liability rather than contribution. Because, however, Appellant's claim only came into being because Appellant seeks to hold A & P liable on an affiliated corporate liability theory, Judge Drain did not err in determining that the claim was for contribution and that it should be determined in the Bankruptcy Court.
Under the WARN Acts, an employer with 100 or more employees must, sixty days in advance of a plant closing or mass layoff, provide written notice to each affected employee or their representative, as well as the state. See 29 U.S.C. § 2102(a); N.J. Stat. Ann. § 34:21-2(a). Failure to comply with the notice provisions exposes the employer to liability for back pay and benefits for the period of the violation, up to a maximum of sixty days. See 29 U.S.C. § 2104(a); see also N.J. Stat. Ann. § 34:21-2(b) (employer to pay severance equal to one week of pay for each full year of employment, but WARN Act back pay
The WARN Act does not address affiliated corporate liability, such as joint or controlling employer liability, but courts have employed the Department of Labor ("DOL") regulations issued under the WARN Act to determine such liability. See 20 C.F.R. § 639.3(a)(2) (setting forth five-factor DOL test); Pearson v. Component Tech. Corp., 247 F.3d 471, 490-91 (3d Cir.2001) (employing DOL test); see also Austen v. Catterton Partners V, LP, 709 F.Supp.2d 168, 173-74 (D.Conn.2010) (noting that Second Circuit has not decided whether parent company may be held liable under WARN Act for subsidiaries' actions, but noting trend among circuits to follow—and subsequently applying—DOL test). Courts applying the DOL test, even in the context of adversary proceedings in bankruptcy, have been able to determine the limited question of whether a company is jointly liable for WARN Act violations under the DOL test. See D'Amico v. Tweeter OPCO, LLC (In re Tweeter OPCO, LLC), 453 B.R. 534 (Bankr.D.Del. 2011) (bankruptcy court analyzing and granting employees' motion for summary judgment on issue of whether debtor and another entity were single employer within meaning of WARN Act); Manning v. DHP Holdings II Corp. (In re DHP Holdings II Corp.), 447 B.R. 418, 422-25 (Bankr.D.Del.2010) (bankruptcy court analyzing issue of whether debtor and other party "may be considered a `single employer' (and therefore jointly liable) for WARN Act violations"); see also In re APA Transp. Corp. Consol. Litig., 541 F.3d 233, 244-45 (3d Cir.2008) (reflecting on "the policy considerations that animate the WARN Act" in finding that under single employer liability for WARN Act violations "it can be determined that two entities should be considered jointly liable for the closing and the subsequent lack of notice" and looking to the DOL five-factor test).
In Law v. American Capital Strategies, Ltd., No. 05-CV-0836, 2007 WL 221671 (M.D.Tenn. Jan. 26, 2007), the Middle District of Tennessee addressed the question of whether Service Transport, a defunct company liquidating under the protection of the bankruptcy court, was an indispensible party under Federal Rule of Civil Procedure 19
While the facts of American Capital Strategies differ somewhat from those here, the reasoning of that case suggests that A & P's potential liability need not be litigated in the New Jersey Action. Guided
Even in situations where, as here, the automatic stay does apply, a bankruptcy court has the discretion under Section 362(d)(1) to grant relief from the automatic stay "for cause," by "terminating, annulling, modifying, or conditioning" the stay. 11 U.S.C. § 362(d)(1). The movant must make an initial showing of cause, and then the burden shifts to the party opposing the motion to prove that it is entitled to the continued protections of the automatic stay. See id. § 362(g); Spencer v. Bogdanovich (In re Bogdanovich), 292 F.3d 104, 110 (2d Cir.2002); In re Cicale, No. 05-CV-14462, 2007 WL 1893301, at *3 (Bankr.S.D.N.Y. June 29, 2007). Courts regularly employ the Second Circuit's twelve-factor test, commonly referred to as the "Sonnax factors," to determine whether the movant has made the requisite initial showing of cause. See In re Sonnax Indus., 907 F.2d at 1286. To the extent the factors apply, courts can consider:
Id. "The Bankruptcy Court's decision [regarding automatic stay relief] should not be disturbed on appeal where the record shows that court considered the appropriate factors for determining whether cause for relief from the stay exists." Grayson v. WorldCom, Inc. (In re WorldCom, Inc.), No. 05-CV-5704, 2006 WL 2255071, at *2 (S.D.N.Y. Aug. 4, 2006); accord Case v. United States (In re Case), 384 Fed.Appx. 43, 44 (2d Cir.2010).
Appellant argues that relief from the automatic stay was appropriate because it faces the risk of inconsistent judgments
Appellees argue that the New Jersey Action is exclusively a dispute between Appellant and Local 863. (Appellees' Br. 19.) Moreover, under Sonnax factors 1, 2, 10, 11, and 12, respectively, according to Appellees, the Bankruptcy Court is in a better position to handle Appellant's claims because it can also decide the priority of such claims and permit Appellant to collect on those amounts; there is plainly a close connection between the New Jersey Action and Appellees' bankruptcy case; judicial economy weighs in favor of adjudicating claims in the context of the chapter 11 case because the claims are for rejection damages; the parties are nowhere near ready for trial in the New Jersey Action; and the balance of harms favors Appellees because, among other things, the New Jersey district court does not need to reach the issue of whether Appellees are a joint or controlling employer of Appellant in the New Jersey Action, and thus the Bankruptcy Court would be the only court to make a determination on that issue. (See id. 17-21.)
At the April 28 hearing, Judge Drain closely analyzed the relevant Sonnax factors in determining that the stay should not be lifted. He noted the "distinct connection" between the claims in the proposed third-party complaint and Appellees' bankruptcy case; found that while both courts were capable of handling WARN Acts litigation, the Bankruptcy Court—not the New Jersey district court—had "distinct expertise" to evaluate the nature and priority of Appellant's claims; determined that other of Appellees' creditors could be prejudiced by having the issues litigated in the New Jersey Action; noted that the parties were not ready for trial in the New Jersey Action; and held that judicial economy would not be served by litigating the proposed third-party complaint in the New Jersey Action because the issue before the New Jersey district court is whether Appellant is liable to its employees for failing to give notice under the WARN Acts, whereas the issue in the proposed third-party complaint is whether Appellees are liable to Appellant on a contribution theory because of their status as joint or controlling employer. (See Hr'g Tr. 160:11-162:24.)
Judge Drain did not abuse his discretion in determining not to lift the automatic stay. As discussed above, Appellant's claims against Appellees relate to pre-petition conduct under Section 365, which provides a close connection between
Finally, I am not persuaded by Appellant's argument that the Supreme Court's decision in Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011)—which held that a bankruptcy court "lack[s] the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim," id. at 2620
Although I need not decide the issue definitively, I am inclined to conclude that the proposed third-party claims would be core or at least claims that arose in the bankruptcy case, and the Bankruptcy Court would have the ability to enter final judgment. In any event, it is not so clear that the Bankruptcy Court could not enter final judgment that Judge Drain's conclusions are an abuse of discretion. First, Appellant's claims relate to "matters concerning the administration of the estate," making them core under the Bankruptcy Code. 28 U.S.C. § 157(b)(2)(A); see Point Blank Solutions, Inc. v. Robbins Geller Rudman & Dowd LLP (In re Point Blank Solutions, Inc.), 449 B.R. 446, 450 (Bankr. D.Del.2011) (claims for declaratory relief that arise "directly from the substantive bankruptcy law right to reject executory contracts" are matters concerning administration of estate); Republic Underwriters Ins. Co. v. DBSI Republic, LLC (In re DBSI, Inc.), 409 B.R. 720, 727-28 (Bankr. D.Del.2009) (finding that rejection of leases under Section 365 "pertain[s] to the administration of the estate"). Further, rejection of "executory contracts are fundamental issues of bankruptcy law unique to the Bankruptcy Code," and thus challenges to the effects of rejection orders are core proceedings because they are claims that would not exist independent of the bankruptcy case. In re DBSI, Inc., 409 B.R. at 728; see NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984) ("[T]he authority to reject an executory contract is vital to the basic purpose to [sic] a Chapter 11 reorganization, because rejection can release the debtor's estate from burdensome obligations that can impede a successful reorganization."). Moreover, even if Appellant's proposed claims are neither related to administration of the estate nor core, they certainly "arose in" Appellees' chapter 11 case, because Appellees' right to reject executory contracts under Section 365 is "based on a right created by the Bankruptcy Code" and thus claims flowing from such a right "can only be brought in a case under the Bankruptcy Code." In re Salander O'Reilly Galleries, 453 B.R. at 114. Accordingly, the Bankruptcy Court likely has authority after Stern to enter final judgment on them.
For the reasons stated above, I do not find that the Bankruptcy Court abused its
For the foregoing reasons, the Final Order of the United States Bankruptcy Court, dated May 2, 2011, is hereby AFFIRMED. The Clerk of the Court is respectfully directed to docket this decision and close the case.
