Adams v. S. Produce Distribs.
| Decision Date | 28 March 2022 |
| Docket Number | 7:20-CV-53-FL |
| Court | U.S. District Court — Eastern District of North Carolina |
| Parties | BLAKE GARY ADAMS; WILLIAM GARY ADAMS; KEITH SMITH; D&T FARMS, INC.; and WARREN FARMING PARTNERSHIP, Appellants, [1] v. SOUTHERN PRODUCE DISTRIBUTORS, INC., Appellee. |
This consolidated case is before the court on appellants' appeals from an interlocutory order of the bankruptcy court entered March 11, 2020. See In re S. Produce Distributors, Inc., 616 B.R. 667 (Bankr. E.D. N.C. 2020) (hereinafter the “bankruptcy court's order”). Appellee responded in opposition, and appellants have replied. In this posture, the issues raised are ripe for ruling. For the following reasons, the bankruptcy court's order is affirmed.
The instant appeals arise out of five adversary proceedings commenced within a bankruptcy case, No. 18-002010-5-SWH (E.D N.C. ) (the “bankruptcy case”), in which appellee is the debtor and appellants are unsecured creditors. Appellee's business operations included purchasing sweet potatoes from growers and packaging and selling them to wholesale and retail vendors. Appellants' business operations include growing sweet potatoes. To provide context to the bankruptcy court's order and the issues raised on appeal, the court first summarizes below the procedural history of the bankruptcy case, followed by a summary of the adversary proceedings and the instant appeal.
Appellee filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on April 20, 2018 (the “petition”). Two of the five appellants filed proofs of claims in the bankruptcy case: Warren Farming Partnership (“Warren”) in the amount of $437 404.84; and D&T Farms, Inc., (“D&T”) in the amount of $602, 528.13.[2] The other three appellants did not file proofs of claims, but they are listed in the petition as having unsecured claims in the following amounts: Blake Gary Adams (“B. Adams”) in the amount of $33, 226.48; William Gary Adams (“W. Adams”) in the amount of $78, 656.40; and Keith Smith (“Smith”) in the amount of $256, 707.40.
Four months after the petition date, appellee filed an emergency motion for authority to make interim payments on critical pre-petition grower claims. (Record (DE 26-1) 246) (the “emergency motion”). The emergency motion explained that appellee could not “continue as an ongoing business operation unless it is able to secure sweet potatoes” from its growers, and most of the growers with available sweet potatoes for sale were the same growers who previously supplied sweet potatoes and held pre-petition claims. (Id. at 247). Further, appellee represented, “most of the [g]rowers will refuse to sell any of their sweet potatoes to [appellee] unless their respective pre-petition claim is paid in full.” (Id.). Accordingly, appellee sought authorization “to make interim payments on the pre-petition grower claims” identified in the motion, where all of the appellants were included amongst those identified. (Id. at 248, 250). At hearing on the motion, upon objections raised, appellee amended the relief sought to obtain authorization to make “prepayments for . . . new purchase contracts” where the amount of each pre-payment “would be based upon a mathematical formula of up to 80% of [each] [g]rower's unpaid, pre-petition claim” against appellee. (Id. at 254). But such pre-payment was not to be “a payment of any pre-petition amount owed to any [g]rower.” (Id.).
On September 7, 2018, the bankruptcy court entered an order granting the emergency motion, as amended, authorizing appellee to enter into post-petition contracts with growers, including appellants, in which appellee could make “partial pre-payments” for the purchase of new sweet potatoes. (Id. at 256) (hereinafter the “pre-payment order”). The pre-payment order incorporated by reference the requested formula for calculating the amount of pre-payments, and allowed appellee to make such pre-payments out of its “Auxiliary Account or . . . Cash Collateral Account.” (Id.). The pre-payment order also noted that appellee then forecasted a “proposed treatment of a class of Grower claims in a proposed Plan of Reorganization, ” whereby growers would have the option to “recharacterize and convert the full amount of prepayment it has received . . . into a credit and payment in the same dollar amount of pre-petition [g]rower debt.” (Id. at 255).
Thereafter, appellee filed a plan of reorganization and amended plans, culminating in a fifth amended plan of reorganization on January 29, 2019. The bankruptcy court confirmed the fifth amended plan of reorganization, on February 14, 2019, as modified at confirmation hearing, and incorporated into the confirmation order (hereinafter, the “confirmed plan” and “confirmation order”). The confirmed plan did not provide for ongoing operations of appellee, but rather provided for the sale of “all operating assets” of appellee, “sale and disposition of . . . remaining Retained Assets, ” “payment in full of all secured claims, ” and “treatment and payment of all allowed unsecured claims to the extent of available Disposition Proceeds.” (Id. at 269).
(Id. at 260).
After consummation of asset sales contemplated in the confirmed plan, on May 1, 2019, appellee commenced the five adversary proceedings out of which this appeal arises, one against each appellant, which the court will describe in further detail in the next section of this order. (See Bankr. E.D. N.C. Nos. 19-64-5 (B. Adams); 19-65-5 (D&T); 19-66-5 (W. Adams); 19-67-5 (Smith); 19-69-5 (Warren)).[3] Thereafter, on October 16, 2019, appellee filed in the bankruptcy case objections to claims of Warren and D&T, as well as objections to scheduled claims of B. Adams, W. Adams, and Smith. (See Bankruptcy Case Docs. 658, 659, 661-663).[4] In appellee's latest post-confirmation report, filed January 26, 2022, appellee notes the pendency of the adversary proceedings, unresolved objections, impasse reached at mediation, and certain real estate sales contemplated by the terms of the confirmed plan to take place in 2022. (Id. Doc. 950).
In its original complaints, appellee asserted that appellants breached post-petition contracts with appellee by failing to deliver some or all of an agreed-upon amount of sweet potatoes, or requiring additional payments to obtain an agreed-upon amount of sweet potatoes. Instead, appellee alleges, appellants applied payments received from appellee to appellee's pre-petition debts, in violation of the pre-payment order. Appellee contends this conduct by appellants impaired its “efforts to continue as an operating entity” and forced it to abandon reorganization and instead enter into the confirmed plan providing sale of its assets. (E.g., DE 26-15 at 12 ). Appellee asserted claims for breach of contract, unjust enrichment, and violation of the automatic stay, and it sought compensatory and punitive damages, declaratory relief, and contempt sanctions for violation of the pre-payment order.
Appellants filed answers in each of their cases demanding a jury trial. In addition, four appellants (B. Adams, W. Adams, Smith, and Warren) asserted counterclaims in their answers, alleging that appellee breached post-petition contracts by refusing to pay for or accept delivery of sweet potatoes as specified in the contracts.
On October 1, 2019, the bankruptcy court held a hearing concerning the jury trial demands and, after hearing argument from the parties, allowed appellee to amend its complaints. In its operative amended complaints in the adversary proceedings, appellee removed the claims for breach of contract and unjust enrichment, and replaced them with claims for violation of the prepayment order and a claim for turnover of the property of the bankruptcy estate. As relief, appellee seeks an order directing appellants “to return to the [appellee] the funds used by [appellee] to pay” the pre-payment amount under its post-petition contracts with appellants, again with declaratory relief, and contempt sanctions for violation of the pre-payment order. (E.g., DE 26-15 at 80 (Warren Am. Compl.).
Appellants answered the amended complaints, again demanding a jury trial on all issues so triable. In addition, four appellants (B. Adams, W. Adams, Smith, and Warren) again asserted counterclaims in their answers, alleging that appellee breached post-petition contracts by refusing to pay for or accept delivery of sweet potatoes as specified in the contracts.
In its order entered March 11, 2020, which is subject of the instant appeal, the bankruptcy court struck appellants' demands for jury trial. See In re S. Produce Distributors Inc., 616 B.R. at 675. The court reasoned that appellants who had filed...
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