EDWARD G. SMITH, District Judge.
The undersigned presided over a jury trial pertaining to, inter alia, the debtors' misappropriation of trade secrets of a company which produces various food items, including fig spreads. The jury returned a verdict largely in favor of this company and against the debtors. A few months after the jury's verdict, the debtors filed for chapter 11 bankruptcy.
During the post-trial motions phase of the litigation, the parties entered into a settlement agreement after extensive negotiation before the undersigned. The settlement agreement contained language by which this court would retain jurisdiction over disputes arising under the agreement. The agreement also stated that the fig spread company would "have the ability to pursue its current [unsecured] claim in Bankruptcy Court but will support any plan not inconsistent with this agreement as long as it pays out at least 10%."
In their final proposed chapter 11 reorganization plan, the debtors treated the fig spread company differently than other unsecured creditors. More specifically, while the plan provided that the fig spread company would receive 10% of its claim, the other unsecured creditors would receive at least 39% and possibly up to 50% of their claims. The fig spread company filed an objection to this plan, and the bankruptcy court scheduled a hearing on the objection.
The fig spread company then filed a motion for this court to withdraw the reference to the bankruptcy court. The fig spread company's argument is that they have shown cause as to why the court should permissively withdraw the reference in large part because of the court's involvement in the underlying proceedings,
The debtors oppose the motion noting that the objection to confirmation of the plan is a "core" proceeding under 28 U.S.C. § 157(b)(2), which the bankruptcy court should address. In addition, they argue that the fig spread company has mistakenly stated that resolving the objection is premised only on interpreting the settlement agreement. Instead, they contend that the issue is whether the debtors have unfairly discriminated against the fig spread company in contravention of 11 U.S.C. § 1129. They also note that the bankruptcy court is sufficiently familiar with the proceedings to be able to address the objection and any issues with interpreting the language of the settlement agreement.
For the reasons stated below, the court agrees with the debtors that the objection to the confirmation of the plan is a "core" proceeding under 28 U.S.C. § 157(b)(2) which weighs against withdrawing the reference. In addition, the other factors relevant to the court's consideration of permissively withdrawing the reference in this case weigh against withdrawal. Accordingly, the movant has failed to show cause warranting permissive withdrawal of the reference, and the court denies the motion for withdrawal of reference.
The debtors, Earth Pride Organics, LLC ("EPO") and Lancaster Fine Foods, Inc. ("LFF") (collectively, the "Debtors"), were formed to "manufactur[e] various food products including but not limited to mustard, sauces, marinades, hot sauces, salad dressings, etc." Fourth Am. Jt. Disclosure Statement with Respect to Fourth Am. Plan of Reorganization Proposed by Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., Debtors-in-Possession, and the Official Committee of the Unsecured Creditors ("Disclosure Statement") at 4, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 429. "EPO is the parent company to LFF and both companies share employees and other various assets." Id.
On May 31, 2017, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Pennsylvania. See Voluntary Pet. for Non-Individuals Filing for Bankr., In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 1; Voluntary Pet. for Non-Individuals Filing for Bankr., In re: Lancaster Fine Foods, Inc., No. 17-13819-elf (Bankr. E.D. Pa.), Doc. No. 1. The Debtors asserted that they had to file for bankruptcy because
Disclosure Statement at 5.
Via an order dated June 9, 2017, the bankruptcy court authorized the joint administration of the Debtors' bankruptcy cases in accordance with Rule 1015(b) of the Federal Rules of Bankruptcy Procedure. See Order, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 41; see also E-order, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 51. On July 3, 2017, Dalmatia filed a motion for relief from the automatic stay under 11 U.S.C. § 362. See Dalmatia Import Group, Inc.'s Mot. for Relief from the Automatic Stay, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 98.
In the motion, Dalmatia explained that on February 28, 2017, a jury returned a verdict in its favor and against the Debtors on Dalmatia's claims for misappropriation of trade secrets, trademark infringement, and counterfeiting in violation of the Lanham Act, breach of contract related to a nondisclosure agreement, and conversion. See id. at 3. Dalmatia also noted that (1) the undersigned entered judgment in accordance with the jury's verdict on May 3, 2017; (2) the matter was in the post-trial motions phase with (a) the Debtors having not filed any such motions, (b) Dalmatia having filed a motion for a permanent injunction and renewed motions for judgment as a matter of law on its claims for breach of the noncompetition agreement, civil conspiracy, and unfair competition, and (c) Dalmatia having filed a motion for an award of attorneys' fees against the Debtors and the other defendants; (3) the undersigned stayed the motions with respect to the Debtors due to the automatic stay; and (4) the undersigned set a hearing date of August 1, 2017, for Dalmatia's post-trial motions to the extent they related to non-bankrupt defendants. See id. at 3-4 (referencing Dalmatia Import Group, Inc., et al. v. Foodmatch, Inc., et al., Civ. A. No. 16-2767 (E.D. Pa.) (the "Fig Spread Action"), Doc. Nos. 321, 354).
On July 31, 2017, the bankruptcy court entered an order granting in part and denying in part Dalmatia's motion for relief from the automatic stay. See Order, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 134. In this order, the bankruptcy court lifted the stay to allow Dalmatia to proceed in the Fig Spread Action on its (1) claims for injunctive relief against the Debtors, and (2) renewed motion for judgment as a matter of law on its claim for breach of contract and for a permanent injunction. See id. at 1. The court denied all other requests for relief in the motion. See id. at 2.
The United States Trustee for Region 3 appointed an Official Committee of Unsecured Creditors (the "Committee") pursuant to 11 U.S.C. § 1102(a)(1) on August 14, 2017. See Appointment of Committee of Unsecured Creditors, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 146. The Debtors filed their original Chapter 11 plan of reorganization and disclosure statement on November 20, 2017, in accordance with 11 U.S.C. § 1121. See Plan of Reorganization Proposed by Debtors-in-Possession, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 239; Disclosure Statement Proposed
On October 11, 2017, Dalmatia, the Debtors, and the other parties to the Fig Spread Action settled the matter after a settlement conference with the undersigned.
See Settlement Agreement at ECF p. 4.
On January 23, 2018, the Debtors filed a motion with the bankruptcy court for the approval of the Settlement Agreement pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure. See Mot. of the Debtors for Approval of a Settlement Agreement Pursuant to Bankr. R. 9019, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. Nos. 304, 306. After a hearing on February 28, 2018, the bankruptcy court entered an order (1) granting the motion to approve the Settlement Agreement, (2) approving the Settlement Agreement, and (3) reserving any and all rights of the Committee, including "the right to object to or subordinate the Claim to the claims of other general unsecured creditors or object to any classification of such claim by the Debtors in any Plan of Reorganization." Order Approving Settlement Agreement, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 339; see E-order, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 340.
The Debtors filed amended versions of their Chapter 11 plan of reorganization and disclosure statement on March 12, 2018, April 27, 2018, and June 1, 2018. See In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. Nos. 345, 346,
In the third amended Chapter 11 plan filed on June 1, 2018, the Debtors created a separate class for Dalmatia apart from the other unsecured creditors. See 3rd Am. Plan of Reorganization Proposed by Debtors-in-Possession at 9, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 419 (listing Dalmatia's allowed claim as Class 5 and other unsecured creditors claims against EPO and LFF in Classes 9 and 10, respectively). This third amended plan indicated that
Id. at 11-12. As for other unsecured creditors, the third amended plan stated that they would receive a payment equal to 15% of their allowed claim "payable in years 1 through 5 at 3% per year," then from years six through 8, the creditors would "be paid 8% of their claims on a monthly basis." Id. at 13. In addition, for these other unidentified, unsecured creditors, the aforementioned "payments may be increased in addition to being paid sooner depending on a tax enhancement in which any income the debtor saves pursuant to the application of Net Operating Losses available to the Debtor which will be split 50/50 between the Debtor and Class 9/10 claims." Id.
The Debtors filed a fourth amended Chapter 11 plan and disclosure statement on June 6, 2018. See Fourth Am. Jt. Plan of Reorganization Proposed by Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., Debtors-in-Possession and the Unsecured Creditors Committee ("4th Am. Plan"), In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 428; Disclosure Statement. The fourth amended plan again treated Dalmatia differently than the other unsecured creditors. See 4th Am. Plan at 9, 10 (listing Dalmatia's allowed claim as Class 5 and other unsecured creditors' claims against EPO and LFF in Classes 8 and 9, respectively). In this regard, the plan again directed that Dalmatia would receive a payout of 10% of its claim "per the stipulation approved on March 2, 2018 in full satisfaction of its
Id. at 13.
The fourth amended plan contained a retention of jurisdiction section, which states as follows:
Id. at 23-24.
The bankruptcy court approved the 4th amended joint disclosure statement via an
Dalmatia also argues that
Id. at ECF p. 4.
The bankruptcy court held a hearing on confirmation of the 4th amended plan on September 6, 2018, at the end of which the court directed the parties to submit a proposed confirmation order. See Minute Entry, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 498. The Debtors submitted a proposed confirmation order on September 14, 2018. See In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 501. Three days later, the bankruptcy court entered an order confirming the 4th amended plan. See Order Confirming Fourth Am. Jt. Plan of Reorganization Dated June 6, 2018, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 502.
The confirmation order provided in pertinent part:
Id. at 5-7.
In accordance with the order confirming the fourth amended plan, Dalmatia filed a praecipe on October 12, 2018, to set a hearing date on the issue of whether it "should remain as a Class 5 Claimant or be reclassified to a Class 8 or 9 Claim, pursuant to its Objection to the Plan filed on July 16, 2018[.]" Praecipe to Set a Hearing Date at 1, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 519. On October 16, 2018, the bankruptcy court set a hearing date on Dalmatia's objections for November 14, 2018. See In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 521.
Dalmatia then filed the instant motion to withdraw reference with the bankruptcy court on October 29, 2018. In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 530.
The bankruptcy court held a hearing on Dalmatia's motion for stay and for expedited consideration on November 8, 2018.
It appears that the bankruptcy court held a hearing on Dalmatia's objection to the fourth amended plan on December 21, 2018. In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 595. Then, on December 21, 2018, the bankruptcy court entered an order which (1) indicated that the parties reported to the court that they would engage in settlement discussions, and (2) set forth a schedule should the parties not settle the matter. See Order at 1, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 596. Dalmatia and the Debtors were unable to settle the matter, so the bankruptcy court entered an order on February 5, 2019, requiring the parties to submit a memorandum of law in support of their respective positions by April 1, 2019, and file a reply memorandum by April 15, 2019. See Order, In re: Earth Pride Organics, LLC and Lancaster Fine Foods, Inc., No. 17-13816-elf (Bankr. E.D. Pa.), Doc. No. 632.
On March 8, 2019, the bankruptcy court entered an order suspending the briefing schedule on Dalmatia's objection, pending further order of court.
Federal district courts have "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." See 28 U.S.C. § 1334(b). A "district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district." 28 U.S.C. § 157(a). While a district court may refer bankruptcy cases to bankruptcy judges, the district court must withdraw the reference if resolution requires consideration of law outside of the Bankruptcy Code. See 28 U.S.C. § 157(d) ("The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce."). In addition, "the district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown." Id.
As indicated by this language in section 157(d), there are two mechanisms — one permissive and one mandatory — by which the district court can withdraw all or part of a proceeding before the bankruptcy court and return it to the district court. In this case, Dalmatia is arguing only for permissive withdrawal of the reference. See Mem. of Law in Supp. of Mot. of Dalmatia Import Group, Inc. for Withdrawal of the Reference Pursuant to 28 U.S.C. § 157(d) and Local Rule 5011-1 ("Dalmatia Mem.") at 5 ("Dalmatia has Shown Sufficient Cause for Permissive Withdrawal[.]" (emphasis omitted)).
"The party seeking the withdrawal of the reference has the burden of going forward to show the grounds for withdrawal and bears the ultimate risk of non-persuasion." In re Camden Ordnance Mfg. Co. of Ark., Inc., 245 B.R. 794, 805 (Bankr. E.D. Pa. 2000) (citations omitted). For permissive withdrawal, section 157(d) "requires in clear terms that cause be shown before the reference can be withdrawn." In re Pruitt, 910 F.2d 1160, 1168 (3d Cir. 1990). Although section 157(d) does not define cause, this court must at least consider "the goals of promoting uniformity in bankruptcy administration, reducing forum shopping and confusion, fostering the economical use of the debtors' and creditors' resources, and expediting the bankruptcy process." Id. The timing of the withdrawal of the reference is also relevant. See id. (discussing timing consideration). In addition, "[a] court's exercise
In support of its motion, Dalmatia focuses on the factors identified by the Third Circuit in In re Pruitt and argues that it can show sufficient cause for permissible withdrawal. See Dalmatia Mem. at 5-8. Dalmatia first contends that withdrawing the reference would promote uniformity in bankruptcy administration because this court (and not the bankruptcy court) "is intimately familiar with the facts, issues and parties relative to the Objection." Id. at 6. Dalmatia notes that the undersigned presided over the Fig Spread Action for two years, including presiding over the jury trial which resulted in a verdict largely in Dalmatia's favor. See id. In addition, Dalmatia claims that the undersigned's mediation efforts were significant in the parties settling the matter, and the undersigned specifically retained jurisdiction to resolve disputes arising under the Settlement Agreement. See id.
Concerning forum shopping and confusion, Dalmatia asserts that forum shopping is not an issue here because this court expressly retained jurisdiction to resolve disputes related to settlement. See id. As for the most economical use of the parties' resources, Dalmatia believes that it would not be economical to proceed before the bankruptcy court because the parties would have to bring the bankruptcy court "up to speed regarding the Settlement Agreement and disputes thereunder" whereas "the District Court is already familiar with the parties, the facts, and the Settlement Agreement." Id. at 6-7.
Regarding expediting the bankruptcy process, Dalmatia contends that the only open issue with the 4th amended plan is its objection and, if the bankruptcy court resolves the objection, the parties can appeal to the district court. See id. at 7. As such, allowing the district court to resolve the issue will bypass the possibility of an appeal and expedite the process. See id. As for the final factor, the timing of the request for withdrawal, Dalmatia contends that its request is timely because it filed the motion shortly after the Debtors changed the chapter 11 plan to treat it differently than the other unsecured creditors. See id. at 7-8.
In their opposition to the motion to withdraw reference, the Debtors argue that Dalmatia ignores any discussion as to whether the resolution of its objection is a "core" or "non-core" proceeding. See Mem. of Law of the Debtors in Opp. to the Mot. of Dalmatia Import Group, Inc. for Withdrawal of the Reference Pursuant to 28 U.S.C. § 157(d) at 7, Doc. No. 4. The Debtors point out that the objection is a core proceeding because it "neither affects nor revolves around the Settlement Agreement reached before [the undersigned] in 2017. On the contrary, the Objection at issue here solely involves issues of unfair discrimination under 11 U.S.C. § 1129(b)(1)." Id. at 8. In addition, it is essentially a proceeding involving the confirmation of a plan, which is expressly identified as a "core" proceeding under section 157(b)(2) of the Bankruptcy Code. See id. at 9-10. As it is a core proceeding, this weighs against the district court withdrawing the reference. See id. at 8-9 (citations omitted).
Regarding the In re Pruitt factors, the Debtors argue that allowing the bankruptcy court to decide the objection "promotes uniform administration because all prior proceedings in that Court have involved
After reviewing the parties' submissions and the bankruptcy court record, it is unfortunate that Dalmatia did not address, in either its initial submission or in a reply brief, whether this matter involves a "core" or "non-core" proceeding. Nonetheless, it appears that the resolution of Dalmatia's objection is a "core" proceeding under the Bankruptcy Code as it is part of the process of confirming a plan.
The In re Pruitt factors also do no warrant withdrawing the reference in this case. In the first instance, from a timing perspective, the court disagrees with Dalmatia that it acted promptly in seeking to withdraw the reference.
At bottom, it surely does not appear from the record that "this [was] the first opportunity Dalmatia has had to seek withdrawal." Dalmatia Mem. at 8. Instead, Dalmatia filed its objection with the bankruptcy court in July and did not file the instant motion until the end of October, when the bankruptcy court had a hearing scheduled for approximately two weeks later. As such, this factor weighs against withdrawal.
Secondly, there is no indication that withdrawing the reference will somehow expedite the bankruptcy process. While the court recognizes the possibility that the losing party before the bankruptcy court may seek to appeal from the adverse ruling, there are multiple potential possibilities as to what could occur even if this court withdraws the reference and a party is dissatisfied with this court's ruling. In other words, it is unclear that withdrawal will expedite the bankruptcy process.
As for the final factors, while the court admittedly retained jurisdiction to resolve disputes, this court is in no better position to determine whether the Debtors are unfairly discriminating against Dalmatia under the 4th amended plan than the bankruptcy court. In this regard, to the extent that part of the dispute centers on the terms of the settlement agreement, both this court and the bankruptcy court would seemingly have to follow principles of contract law to address the issue. Both courts would "have to get up to speed" by evaluating the parties' arguments and the applicable law, so it would not be any more economical to have this matter heard here.
As a final note, the court recognizes that the settlement agreement in the Fig Spread Action provides for this court's retention
The court does not find that Dalmatia has shown sufficient cause to withdraw the reference to the bankruptcy court in this action. Dalmatia's objection to confirmation of the 4th amended plan is a "core" proceeding under the Bankruptcy Code because it either invokes a substantive right provided by title 11 or is a proceeding that could arise only in the context of a bankruptcy case. The objection, while partially involving interpretation of language in the settlement agreement, primarily concerns whether the Debtors are unfairly discriminating against Dalmatia. This is an issue that the bankruptcy court is in a better position to address in the first instance. Additionally, the In re Pruitt factors do not support cause for withdrawal of the reference. Accordingly, the motion to withdraw reference is denied.
The court will enter a separate order.
Dalmatia's Objs. at 2-3.